Summary of Robert J. Shiller's Irrational Exuberance

By IRB Media

Please note: This is a companion version & not the original book.

Book Preview: #1 Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, and in the process, amplifies stories that justify the price increase.

#2 The Dow Jones Industrial Average, a stock market index, peaked in January 2000 at 11,722. 98. The real (inflation-corrected) Dow did not reach this level again until 2014.

#3 The stock market boom from 1982 to 2000, which I will call the Millennium Boom, was not justified in any reasonable terms. Basic economic indicators did not come close to tripling over that period, and corporate profits rose less than 60 percent.

#4 The end of the 2000 boom brought stock markets down across much of the world by 2003, as can be seen in Figure 1. 2. The next boom, peaking in late 2007 or early 2008, had huge impacts over much of the world.

• Language: English
• Publisher: IRB Media
• Release date: Mar 10, 2022
• ISBN: 9781669364702

IRB Media

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Insights on Robert J. Shiller's Irrational Exuberance

Contents

Insights from Chapter 1

Insights from Chapter 2

Insights from Chapter 3

Insights from Chapter 4

Insights from Chapter 5

Insights from Chapter 6

Insights from Chapter 7

Insights from Chapter 8

Insights from Chapter 1

#1

Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, and in the process, amplifies stories that justify the price increase.

#2

The Dow Jones Industrial Average, a stock market index, peaked in January 2000 at 11,722. 98. The real (inflation-corrected) Dow did not reach this level again until 2014.

#3

The stock market boom from 1982 to 2000, which I will call the Millennium Boom, was not justified in any reasonable terms. Basic economic indicators did not come close to tripling over that period, and corporate profits rose less than 60 percent.

#4

The end of the 2000 boom brought stock markets down across much of the world by 2003, as can be seen in Figure 1. 2. The next boom, peaking in late 2007 or early 2008, had huge impacts over much of the world.

#5

The boom and crash in the stock market in the years after 1994 are related to the behavior of earnings. As can be seen in Figure 1. 1, SP Composite earnings grew very fast in the late 1990s before they crashed after 2000, rose again until 2007, and then utterly crashed in 2009.

#6

The price-earnings ratio is a measure of how expensive the market is relative to an objective measure of the ability of corporations to earn profits. The ten-year average smooths out events such as the temporary burst of earnings during World War I, the temporary decline in earnings during World War II, and the frequent boosts and declines that we see due to the business cycle.

#7

The price-earnings ratio, which measures the value of a company based on its stock price, dropped dramatically between 2000 and 2001. This was due to the investor psychology changes that produced the decline in the market.

#8

There have been three previous times when the price-earnings ratio reached high values, in June 1901, September 1929, and December 1958. The ratio attained a value of 32. 6 in September 1929, and the market tumbled from that high with a real drop of 80. 6 percent by June 1932.

#9

The third instance of a high price-earnings ratio occurred in January 1966, when the ratio reached a local maximum of 24. 1. This peak came after a dramatic bull market and after a five-year real price surge of 52 percent from May 1960.

#10

The stock market has continued to rise, and in 2017, the news media celebrated new records set by the stock market. But people know that the market was then and is now highly priced. They are uncomfortable with this fact.

Insights from Chapter 2

#1

The path of interest rates through time has been a matter of