In This Review

Irrational Exuberance
Irrational Exuberance
By Robert J. Shiller
Princeton University Press, 2000, 296 pp

A Yale economist, Shiller has provided an accessible guide to the usually impenetrable literature on financial markets, especially the American stock market. He finds that its performance deviates markedly from the "rational" behavior usually postulated in economics textbooks. Drawing on psychology, he underscores the fact that investors -- and, more shockingly, the analysts who advise them -- do not provide independent judgments on investments. The result is a herd behavior that leads to market volatility far worse than the result of slowly changing fundamentals. Concluding the book in late 1999, Shiller finds the U.S. stock market (and several foreign ones as well) greatly overvalued by any plausible historical or analytical standard. He also sketches the implications of a major stock market crash, such as the effects on private pensions and endowments. Skeptical of proposals to limit or interfere with financial markets, he urges instead the development of new but unconventional financial markets based on the performance of entire economies or even professions -- so that individuals could diversify their portfolios and financially hedge their choice of professional career.