Customer Reviews
Packed with Knowledge! - By: Rolf Dobelli, 07 Sep 2005 
Shortly after a 1996 briefing by author Robert J. Shiller, Alan Greenspan, chairman of the U.S. Federal Reserve Board, warned the country about the mood of "irrational exuberance" that was pushing up stock prices. In hindsight, it's clear that the bull was just beginning. Anyone who heeded that warning would have missed nearly unprecedented gains. But Shiller proved prophetic when the market peaked & crashedin 2000, the year he published this book's first edition. Shiller isn't teaching market timing; he's debunking cherished investing axioms, such as the belief that stocks or real estate are necessarily great long-term investments. He discredits financial reporting, notes the psychological & emotional factors that make investors behave irrationally, & sounds a note of caution as timely now as it was at the turn of the millennium. This book vaccinates you against the virus of credulity. We suggest a copy for every investor - dog-eared from frequent rereading. It's a wise investment.
bubble bubble - By: tomsk77, 26 Aug 2003 
Shiller stands as one of the few people to come out of the experience of the recent bubble with his reputation enhanced. His book came out at pretty much the peak since when the market had dropped an incredible amount.
I can see why people didn't like hearing what he was saying at the time butin retrospect it is hard to challenge much of what he says. P/E ratios were wildly out of line with historical precedent with no clear reason why (seemingly sometimes just because the companies had websites!). I never really bought the US productivity miracle story anyhow but it seems increasingly clear that the reason for higher productivityin US firms is predominantly that employees work significantly more hours than European equivalents, not because of a techological revolution.
It makes interesting reading that there was very similar talk of "new eras" during previous bubbles, & of small investors only just realising that equities were a better investment over the long-run (how many times will this one be trotted out I wonder). Also having spoken to quite a few people who made & then lost a few grandin TMT stocks I find it very hard to dismiss the central idea thatin such cases bubbles are really just naturally-forming pyramid schemes.
finally personally I'm gob-smacked that anyone actually bothers to seriously listen to fund managers anymore. They were no better at avoiding the collapse of the bubble than the day-traders as our staff pension fund has learnt to its cost. The only big investor to arguably call it right was Tony Dye at PDFM but he was two years or so too early.
I'm only giving it four stars because a) it's now of historical interest & not that practical for the future & b) because I found it too easy to understand. I'm not an investment expert & I'm wary of simplistic explanationsin areas I don't know very well.
Having said that I do think there is a great deal of sensein what he says, & it is well worth a read if only to puncture any lingering illusions you may have about efficient markets.
An elegantly simple book on why markets ignore fundamenals - By: , 10 Feb 2001 Not so long ago, the rise of the NASDAQ to a a peak of over 5,000 was seen as a clear sign that we had entered a new economic era. Economic cycles were a thing of the past, new technology & the belief that the all-powerful US Fed would ride to our rescue encouraged investors to bid up share prices to levels that nowin hindsight looked certainly unrealistic. Academic studies on stock markets teach us that prices of stocks eventually return to their long-trend line. However, as Shillerin this elegantly simple book demonstrates, financial markets periodically detach themselves from economic fundamentals. The trending or herd influence of investors pulls markets to over-optimistic & over-pestimistic levels. Stock market psychology as Shiller shows is simply the use of rules of thumb by investors that distorts the efficient market over the short term. What Shiller unfortunately does not investigate is how style factors could become even more confusing as more & more investors (primarily institutional fund managers) become more conscious of the potential of style investing. However, the insight that the herd is probably made up of a bunch of headless chickens (who use feeling & not disciplined analysis) can be enjoyed by both active & disillusioned investors.
A worthwhile addition to the literature on the subject - By: mikegordonw@aol.com, 01 Jan 2001 It was on 5 December 1996 that Alan Greenspan described the behaviour of investors who had driven the value of shares on the New York Stock Exchange to record levels as "Irrational Exuberance". Robert J. Shiller has used this remark as the title of his book & the starting point for an examination of stock market & investor behaviour which is both accessible to the general reader & adds to the existing stock of serious work on the subject.
Robert Shiller begins his look at irrational exuberancein financial markets by outlining the evidence, which he finds convincing, that the current level of stock markets (even allowing for the poor performance during the year 2000) is far above that which is reasonable or rational.
He argues that this behaviour can be explained by 12 factors which are examinedin the subsequent chapters. These are a mixture of common perceptions which drive markets higher than the underlying facts justify (role of internet, baby boom, expansion of defined contribution pension schemes, decline of economic rivals, cultural change favouring business, Republican congress, growth of mutual funds), cultural & psychological factors which have affected investor behaviour (expanded media reporting, optimistic forecasts of analysts, rise of gambling opportunities) & feedback mechanisms. The detailed analysis which follows explains convincingly how bubbles emerge through feedback effects (feeding upon themselves driving markets upwards or down). It also discusses the role of the media (which ultimatley Shiller regards as having at best a short-term influence on market behaviour), the psychology of the investor (for me the least convincing part of the book) & an interesting chapter discussing the arguments of efficient market theorists & their attempts to justify current stock market levels with reference to dividend values (since they are so clearly at variance with price earnings ratios).
Finally Shiller concludes with his recommendations to overcome the irrationality of markets. Paradoxically, these mean an expansion of the role of the market through the commodification of more risks & the action of investors to spread their risks beyond the stock market.
Robert J. Shiller's book is a great introduction for those interestedin the history & causes of financial exuberance. While you may not agree with his conculsions & proposals, the preceding examination of the various causes seems comprehensive & is lucidly explained. Of particular interest are the chapters discussing feedback mechanisms & how financial bubbles are inflated What this section lacks, perhaps because no one has found the answer, is a description of what causes the feedback loop to breakdown & the bubble to deflate. In summary I consider this to be a worthwhile addition to the literature on financial markets & how they can go wrong.
An analysis all the more chilling for its rigour - By: Vincent Toolan, 13 Jun 2000 Schiller's case rests on a rich mix of quantitative & qualitative research & analysis. (By qualitative, I include his surveys of fund managers with small sample sizes). He challenges a great many points of conventional wisdom, showing them to be neither conventional nor wise. One thing he fails to do, however, is systematically refute the hypothesis that high valuations (especially for tech stocks) are justified. Real option pricing, for instance, does demand an approach completely different to that of traditional discounted cash flows: if an investor wishes to take on the risk of an unproven business model, with its attendant uncertainty but large potential upside, that is not necessarily irrational.
Schiller's answer is that the P/E ratios are so far off the historical norms that it's not worth discussing further. And the option pricing view can't hold for the whole market.
The challenges to efficient market theory, & to Jeremy Siegel's (of the Wharton School at U Penn) viewsin "Stocks for the long run" are similarly one step short of complete.
That said, this book serves the invaluable function of challenging the complacency that pervades popular opinion & the media. My own favourite manifestation of this is the Economist's observation that when stocks rise, newspapers describe them as "strong"; when they fall, they are "volatile". What'sin a name? Market sentiment, which drives prices to unsustainable levels.
This book was written because the author cares. Both as an academic & as an observer of public policy, he rightly fears the effects of a collapsein the markets. He deserves to be read.
