Irrational Exuberance 2nd Edition - Robert J. Shiller

Irrational Exuberance is a classic economics read that works at explaining the relationship between financial bubbles and human behavior. The author, Robert Shiller is a well known economist who predicted the dot.com bust at the turn of the century and the implosion of the housing bubble a few years later. The term irrational exuberance stems from an Alan Greenspan speech given at the American Enterprise Institute and televised on C-SPAN. It refers to asset values that escalated for no logical reason.

In the 1st edition Professor Shiller works to help you understand the psychological roots of volatility in financial markets. In the 2nd edition he expands that effort by including real estate in his analysis. Shiller contends that after the dot com bubble burst and stocks declined precipitously, investors moved their money into real estate. This helped inflate real estate prices in America and created a feedback loop that had no long term chance of surviving. By examining the financial and statistical history of the bubble the author demonstrates that this feedback loop had no rational reason for existing and ultimately was more psychological and emotional than anything else.

Professor Shiller challenges the concept of rational markets and rational investors by demonstrating that investing in modern capital markets is not a stable process and is-subject to the many variances in human behavior, many of them unpredictable. Shiller implicitly understands the importance of human perception and how it can affect markets. Yes, the media has some impact but he demonstrates that in many cases it is the power of herd mentality based on a perception that may or may not be accurate that moves markets. He completes the 2nd edition with a series of policy recommendations. Included in the recommendations is reforming Social Security, monetary policy that quietly leans against bubbles and institutional and personal methods to reduce risk.