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Irrational Exuberance Paperback – May 9 2006


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Product Details

  • Paperback: 336 pages
  • Publisher: Crown Business; 2 edition (May 9 2006)
  • Language: English
  • ISBN-10: 0767923634
  • ISBN-13: 978-0767923637
  • Product Dimensions: 15.5 x 1.8 x 23.3 cm
  • Shipping Weight: 358 g
  • Average Customer Review: 4.0 out of 5 stars  See all reviews (1 customer review)
  • Amazon Bestsellers Rank: #18,014 in Books (See Top 100 in Books)

Product Description

Review

“Robert Shiller has done more than any other economist of his generation to document the less rational aspects of financial markets.” — Paul Krugman

“A modern classic of ‘serious’ economics that demands to be read, and can be enjoyed, by the interested nonspecialist.” –The Economist

“A dose of realism that serious investors will ignore at their peril.” —The Wall Street Journal

“The point of Irrational Exuberance is not to help investors dump their houses before the current exuberance fades. It is to deepen our understanding of the events we are watching as one bubble gives birth to another.” —The International Herald Tribune

Irrational Exuberance [is] a dazzling, richly textured, provocative book . . . offering a cogent statement of the bears’ view of events to come. Shiller is not merely a bear—he is a grizzly.” —BusinessWeek

From the Back Cover

“A dose of realism that serious investors will ignore at their peril.” —The Wall Street Journal

“The point of Irrational Exuberance is not to help investors dump their houses before the current exuberance fades. It is to deepen our understanding of the events we are watching as one bubble gives birth to another.” —The International Herald Tribune

Irrational Exuberance [is] a dazzling, richly textured, provocative book . . . offering a cogent statement of the bears’ view of events to come. Shiller is not merely a bear—he is a grizzly.” —BusinessWeek


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Format: Paperback
The introduction is about the stock market and the real estate market. In these two chapters he shows the abnormalities of speculation. It is a historical view on price earning ratios and rural price developments.
The first part begins with the technological developments that increase the trends in investments. These include a trend in ownership, more reports in business on the media and online accounts for trading. The psychological aspects show more implication on the bubbles. A feedback model shows the effects on a self-fulfilling investment trend. The facts include the psychological aspects on the behaviour of the people. He shows this in survey reports.
In the second part he follows the idea that the media had no significant influence on the stock market returns. He summarises the great crashes in the last century and gives you the reasons for it.
The third part goes back to the psychological factors. Most people referees to an anchor in their investment decisions. It can be the price of the stock in the last year or a story which is told by the company. Most of the people can not find the right price of a stock. So they are overestimating the price and have a false probability distribution. These factors lead to a bubble because the people follow information cascades and there is a trend for herd behaviour.
In the fourth part he wants to rationalise the market movements. The efficient market hypothesis is the best model to explain the current price of a stock. He doubts this and compares it with the market model of stock valuation. It is the discount model of dividends that scribes the stock price. To test the efficient market hypothesis he goes the wrong way. You can test the efficient market hypothesis with a dividend model.
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Most Helpful Customer Reviews on Amazon.com (beta)

Amazon.com: 132 reviews
440 of 461 people found the following review helpful
An Act of Courage March 22 2000
By Arnold Kling - Published on Amazon.com
Format: Hardcover
Robert Shiller argues that the stock market has experienced a bubble. He makes his case on the basis of a sober statistical judgement. However, in layman's terms, what he says boils down to, "If it walks like a duck, it is a duck." Demonstrating the absurdity of today's stock prices does not require clever statistical modeling.
This begs the question of why a bubble emerged in the late 1990's. Shiller discusses several cultural factors such as the ever-higher profile of the stock market in the media, including the Internet.
This begs the question of how it is possible for so many people wrongly to be optimistic about stocks. Shiller cites many findings in psychology, such as Asch Conformity, to explain how people can listen to others against their own best judgement.
This begs the question of whether it could be Shiller who is irrational. Shiller examines and refutes the arguments that pundits have made to rationalize exuberance.
There are three audiences for this book, all of whom will find it threatening.
1. Ordinary investors. You will not want to read this book, because it asks you to confront an issue that you would be more comfortable avoiding. However, once you do dive into it, you will be rewarded with sober facts and analysis that you can use to resist the siren calls of pundits, brokers, and friends to buy into the bubble.
I can assure you that Robert Shiller did not write this book to make his own fortune. The book jacket says nothing like "five strategies to survive the bubble," although he does mention some conservative investment alternatives. There certainly is no endorsement from Suze Orman or any of the other best-selling gurus that he swiftly skewers. This is just an honest book from a scholar with the highest integrity: an act of courage.
2. Economists. I can see a lot of squirming, particularly as Shiller discusses psychological studies that undermine the cherished rationality assumptions of our profession. Shiller is generous with those who disagree with him. He won't say it, but I will.
Shame on us.
Those of us who know better have been too silent. Paul Krugman wastes his bully pulpit in the New York Times discussing IMF esoterica, and only when Shiller's book came out did he mention the bubble.
Then there are those of us who don't know better. The hundreds of finance professor hacks whose tenure rests on mindless justifications and interpretations of irrational stock price movements. ("Events of type X create, on average, $Y of value." Oh, please.)
3. Policy analysts
This book certainly will not appeal to those who think that the biggest problem we are going to face in the next ten years is what to do with budget surpluses. Shiller correctly points out that the social security debate needs to be conducted, at a fundamental level, about what exactly we are promising ourselves. The trade-off between compassion and freedom must be faced. I wish he had illustrated this with a spectrum of alternatives--libertarian, socialist, and in between. This might have helped flesh out an otherwise terse discussion.
68 of 70 people found the following review helpful
Rational Analysis Oct. 9 2006
By B.Sudhakar Shenoy - Published on Amazon.com
Format: Hardcover
I read the second edition of this book since it is enlarged with the study of the housing market. The phenomenon of bubbles and negative bubbles or collapses is described extremely well by means of statistical data of markets for over a century and a half. The raw data is adjusted to inflation to give a realistic perspective of the trends and patterns. Bubbles seem to be occurring at regular intervals typically based on the "new era" story and everyone believes at least during the heady days that good times are here to stay. But as shown by proven evidence of the past, no bubble has sustained itself permanently and good reason prevails sooner or later. When this happens, the bloated bubble collapses and the hangover is terrible. The story so far is quite simple. But what makes this book so interesting is the depth of research and the manner in which the phenomenon is studied and explained.

The combination of mass psychology and market prices is at the core of this book. For bubbles to happen, information flow is the key. Media plays a significant role in disseminating information and bubbles seem to have originated in recorded history after the advent of the print media. In recent times electronic media particularly the television and the internet play a significant role in speeding up bubble formation and also the reversals. Media needs a storyline and this story needs to be continued to retain customers on a daily basis. Stock market is the ideal place that offers an opportunity to try one's luck if a casino is far away. Backed by on-line dedicated news channels and internet trading, well, it is not surprising that we have day traders in herds. In such situations fundamentals like industry analysis and P/E ratios take a backseat as explained by the author. Historical averages are breached and a euphoria of "once in a life time opportunity" prevails. What happens to the Efficient Markets Theory in such situations?. Since this theory says that markets are perfectly priced based on all publicly available information there cannot be a situation of either under pricing or over pricing. This book perfectly challenges the efficiency and accuracy of this theory.

It is unfortunate that substantial amounts of investments meant to be otherwise risk free sources of income, pension funds for example, are getting diverted into risky markets. Here the author has come out with a list of some sound proposals to protect hard earned life long savings of innocent citizens who are exposed to the irrationality of markets.

The bubble in the housing market is also discussed well. Housing seems to be isolated bubbles occurring in specific regions and not a global phenomenon. But nevertheless the damage can be the same. The party of low interest rate regime seems to be over and a spike in mortgage rates is sure to be the needle that will prick right through this big speculative bubble.

What goes up has to come down ! But once you start reading this book, it is difficult to put it down. Intellectually stimulating and bound to be economically rewarding.
77 of 80 people found the following review helpful
Irrational Exuberance March 30 2000
By Harvey S. Karten - Published on Amazon.com
Format: Hardcover Verified Purchase
Robert J. Shiller's "Irrational Exuberance" is about the most bearish book you could ever read about the stock market. Filled with charts and graphs and footnotes of every description, the book--whose title comes from a quote by Alan Greenspan--attacks Wall Street ideas that have become so accepted that they are household sayings. The principal such idea is that securities have always been the best investments over the long run--beating out bonds, foreign currencies, rare stamps, gold and the like. Shiller points out quite a few examples of how market prices, principally the Dow, have remained pretty flat over some periods of 10, 20, 30 years when corrected for inflation. In some circumstances, you might have done better if you put your spare cash in the bank.
Of course the market has been a great place to stash your cash if you got in at the right time--in 1982, for example, at the very start of the longest-running bull market in history. But put your money there now at your own risk. Seventy-two percent of mutual fund managers believe that we're in a speculative bubble now, with the Dow, at 11,000, reaching for figures that far exceed the historic level which would put the rational figure at 6,000. Shiller would not be surprised if the Dow settled in at, say, 10,000--in the year 2020! And what's more, he'd not be astonished if the Dow sank to 6,000 in the near future.
I was convinced after reading Shiller. He has marshalled his facts in a carefully researched screed against following the sheep-like crowds and I have replaced the tens of millions I had invested in common stocks with far more secure, if less exciting, instruments.
Harvey S. Karten film_critic@compuserve.com
29 of 29 people found the following review helpful
Schiller's prophetic book offers practical investment implications Aug. 22 2006
By Andrew Szabo - Published on Amazon.com
Format: Hardcover
About Robert J. Schiller's book, Irrational Exuberance (2000; 2nd ed., 2005), it's hard to say enough good things. First Schiller, who is Stanley B. Resor Professor of Economics at Yale University, had uncanny timing. His warning on the excesses of the technology bubble stock market came out at its very peak, in mid-March of 2000. He wrote in an afterward to the paperback edition (2001) that as he made publicity visits to bookstores in April of 2000, a large carnage had already occurred in the market, particularly for tech stocks and e-business names. Second, he writes in a transparent style. Third, he and his team, instead of tossing out opinions about what they think investors do, carry out frequent sample surveys of both individual and institutional investors. Fourth, he undergirds his hypothesis with numerous insights from economics, psychology, game theory and history. Finally, he gives many cross-references to booms and busts around the globe.

The second edition points to over-valuations in the U.S. real estate market that Schiller believes were comparable to the excesses of the dot-com era in stocks. This prediction may prove to be accurate as well, but the unraveling so far has not proceeded in so dramatic a fashion as did the technology crash.

From what valuation method does Schiller proceed his analysis of stocks? Fundamentally, he bases it on price-earnings ratios. (Price-earnings ratios have been shown to be a crucial characteristic in predicting long term stock portfolio performance; see James P. O'Shaughnessy, What Works on Wall Street [1998, rev.]). More precisely, he uses as his numerator the real (inflation-adjusted) S&P (Standard & Poor's) Composite Stock Price Index. For the denominator, he uses the moving average of the past ten years of real S&P Composite Earnings. Advantages of these data series: the source is considered reliable; they go back to 1841 continuously; they are inflation-adjusted.

Using the price-earnings data and ratio as defined above, a first great cyclical high can be seen in June 1901: a P/E ratio of 24.5 times. Subsequently, P/E declined, and stocks performed in a desultory fashion, until June of 1920. The second great peak, occurring at the end of the Roaring Twenties, was 32.6 times--reached during September of 1929. The Great Crash followed. A third peak occurred during the so-called "go-go" era of the 1960s: 24.1 times in January of 1966. This too came a cropper, followed by years of stock market underperformance--bottoming out in terms of P/E ratio in the early 1980s. The US stock market P/E ratio at the height of the technology boom in 2000 reached an unprecedented 44.3 by January of 2000. Then, boom-boom, out went the lights!

Schiller explores from many perspectives just how markets sometimes reach such giddy highs. One "amplification mechanism" is likened to a naturally occurring Ponzi process. Charles Ponzi attracted 30,000 investors and $15,000,000 within seven months during 1920. Ponzi promoted his scheme by cashing out some early investors, which excited many followers. Ponzi schemes always involve an attempt to pyramid investor inputs while wasting or defrauding much of the principal outside of the touted investment theme. Schiller points out that rapidly rising stock markets can bring in an unintended Ponzi dimension, as late-comers seek to replicate earlier investors' apparent success.

Such feedback loops lead to circles of investor behavior, which can promote the expansion of a bubble, but also can lead to its rapid deflation. Schiller also shows how news media attention to feedback loops can intensify their force and expand the volume of participation by investors. Often, behind investment fads, there are popular ideas about "new eras" that supposedly render irrelevant any historical comparisons. Feedback loops are facilitated by the demonstrated over-confidence of many individuals in their judgments as well as by evolved patterns of mass behavior.

Generally, markets threaten to become untethered whenever investors' principal focus is on price performance rather than fundamental value criteria. In such an atmosphere, it can be imagined that trees truly can grow to the sky. Or at least that there will be a "greater fool" who will take you out of your investment in a timely fashion.

Schiller does not purport to offer a rule of thumb for market trading practice. Indeed, any scheme that could be used continuously and in static form to operate a successful trading system (a putative "money machine") would surely be arbitraged away by perceptive traders. Instead, he lays out a more intuitive case for how to avoid investing in major market excesses when they occasionally occur. His proposed solutions included a salutary emphasis on hedging activities. Some of the hedges he lays out are novel but may not be practical to implement, owing to the problem of illiquidity (lack of ability to trade).

(The author of this review, Andrew Szabo, is founder of MindBodyForce.com)
42 of 46 people found the following review helpful
Rational Expectations April 5 2000
By James R. Sanders - Published on Amazon.com
Format: Hardcover
'Irrational Exuberance' will no doubt consolidate Robert Shiller's position within his chosen field, but the book is also of considerable value to the intelligent lay person. Other writers have drawn attention to the market's overpriced level. Other writers have also done the numbers and concluded that stock returns are not likely to out pace bond returns, for example, over the next decade. But no other writer provides such a detailed and convincing analysis of the factors that have stoked our mania for stocks and brought us to the top of a speculative bubble. Shiller's account of what academics such as Prof. Irving Fisher thought of stock market valuations in the 1920s is a useful reminder that even the experts can get it wrong. More importantly, his analysis of past decades suggests a cyclical movement in the all too human desire to believe in a new economic age. Among the truths which Americans evidently have not learned is that new economic eras do not result in permanent stock market booms. That technology enables more efficient production which in turn helps keep inflation low has been acknowledged publicly by Alan Greenspan. But the market's reaction extends way beyond what this fundamental change might warrant, for all of the reasons Shiller cites.
While Prof. Shiller's analysis is highly credible, his suggestions for the individual investor are, in places, difficult to understand. Indeed his discussion of diversification may only be deciphered by his fellow economists. Lay men and women can hardly be expected to know what "...taking short term positions in claims on income aggregates," means. Nor can they regard his advice to invest in markets that do not yet exist as practical guidance. These, however, are minor quibbles. Unlike many market commentators these days, Shiller's underlying social conscience puts him on the side of the little guy. Yet even so, this books is aimed primarily at policymakers who have the power to influence public behavior for the good. The prospect of thousands of retirees living on the margins because they invested too much of their 401(k) money in the stock market is surely one which will compel their attention.
Jim Sanders Annandale, Virginia


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