Naming "Irrational Exuberance"
Where the book's title phrase came from, and what Shiller means by it precisely — not just "the market is expensive."
The book's title borrows a phrase from a 1996 speech by then-Federal Reserve Chairman Alan Greenspan, who asked aloud how investors would know when "irrational exuberance" had unduly escalated asset values — a question Greenspan himself did not fully answer at the time. Shiller's book is an extended, data-driven attempt to actually answer it: he defines irrational exuberance precisely as a period when investors' enthusiasm for an asset class becomes unmoored from any reasonable estimate of its underlying fundamental value, sustained not by new information about that value but by the psychological and social dynamics covered later in this course.
Critically, Shiller is not simply asserting markets were overvalued in 2000 based on gut feeling — the book's opening chapters lay out his long-run stock market valuation data (the same CAPE ratio referenced in this Book Club's Stocks for the Long Run course) showing that valuations at the time of publication were higher, by this measure, than at any other point in over a century of market history, including immediately before the 1929 crash — a specific, checkable empirical claim, not just a mood or an opinion.
Same measure introduced in this Book Club's Stocks for the Long Run course — Shiller is the economist most closely associated with popularizing it as a long-run valuation gauge, and this book is where he first used it to argue 2000-era valuations were historically extreme.
- The book's title comes from a 1996 Alan Greenspan speech questioning when investor enthusiasm becomes unmoored from fundamentals.
- Shiller defines irrational exuberance precisely: enthusiasm sustained by psychological/social dynamics rather than new fundamental information.
- The claim is backed by his CAPE ratio data showing 2000-era valuations were higher than at any other point in over a century, including just before 1929.