Saturday, October 18, 2008

Irrational Exuberance, by Robert J. Shiller

Published in 2000, this book certainly makes interesting reading in 2008. It’s sort of a psychology of market behaviour. Shiller charts the ‘irrational exuberance’ of stock market prices, showing that they are dramatically overpriced. Shiller then spends the rest of the book looking for reasons why.

It reminded me of Charles Mackay’s classic Extraordinary Popular Delusions and the Madness of Crowds, which, amongst other things, explored the tulip mania and the south seas bubble. However, Shiller is a prescient enough fellow to be writing from within the 'belly of the beast'.

This book doesn’t predict the current global financial woes, but merely states that current stock prices (at the time of its writing of course) are nothing less than extraordinary.

Shiller hypothesises that the reasons for these dramatic prices could be, amongst other things, the extensive, glowing media coverage that the stock market receives, national confidence after the end of the cold war, the fact that not that many Americans have a memory living through a depression. Shiller explores all of these in intricate detail, and basically says that people like a big, bright, happy story, and switch off immediately when they have to look at boring details like market analysis, business earnings etc. etc.

In short they prefer the ‘magical thinking’ that the market will simply go on performing like it’s taking a dose of steroids every morning.

An insightful book if you like living in the world of reality. If not, you might prefer a ‘get rich quick’ type book.

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