Shiller: Irrational Exuberance

Shiller, RJ. 2006. Irrational exuberance. Princeton University Press.

"How we value the stock market now and in the future influences major economic and social policy decisions that affect not only investors but also society at large, even the world. If we exaggerate the present and future value of the stock market, then as a society we may invest too much in business startups and expansions, and too little in infrastructure, education, and other forms of human capital. If we think the market is worth more than it really8 is, we may become complacent in funding our pension plans, in maintaining our savings rate, in legislating an improved Social Security system, and in providing other forms of social insurance" (xii).

The author presents a wide variety of evidence to show that the stock market is currently overvalued by historical standards. Part of the argument is that the investors who are part of the stock system to not understand the constructed nature of markets, and that their growth does not necessarily represent the underlying value of assets. Human psychology plays a clear role in determining stock prices, and the author makes the claim that investment has become irrational and exuberant.

The book goes through a wide variety of explanations for the causes of this excessive investment in equities.