This book is an interesting read. I enjoyed it. However I can’t say that I agree with Shiller. In fact, I don’t think I’ve ever read a book that I disagree with more. Here is why. As always… comments are welcome and email subscriptions are strongly encouraged.
The premise of the book boils down to behavioral finance and the efficient market hypothesis. Throughout the book, Shiller mentions significant economic events and the correlating effects on the market. Then he talks about how the effects are irrational. Shiller believes that the market is full of these self-fulfilling prophecy about the future. Like, investors can will their portfolio’s higher. Shiller’s main goal it to hammer out this obscure factor that governs human action and is artificially propping up the market. Shiller calls this factor irrational exuberance.
My least favorite section of the book is entitled, “Twelve Factors that Propelled the Market Bubbles.” In that section he says this…
I concentrate here mostly on factors that have an effect on the markets not warranted by rational analysis of economic fundamentals.
It’s ironic that Shiller makes this calm. It as if he has a formula that analytically, mathematical, perfectly calculates the price of a stock. It would seem that the only way you can say something is irrational is if you can calculate the variance from rationality. Shiller offers no such model.
Worse still, are the factors Shiller considers to have an effect. Here’s a few listed if my critics…
1. The Capitalist Explosion and the Ownership Society
According to Shiller, people wanted to own more things after the Cold War. Apparently ownership was not viewed favorably until then. I think we can all agree that’s not true. He believes this lead to more people being active in the stock market. So instead of saying “The Capitalist Explosion and the Ownership Society”, Shiller should have said an increased demand for securities pushed the aggregate price of stocks higher. When you write it this way it doesn’t seem irrational.
2. Cultural and Political Changes Favoring Business Success
Here Shiller argues that capital gains tax and lower crime rates give people an incentives to hold securities for a longer than normal. Again these effects don’t seem irrational.
5. An Expansion in Media Reporting of Business News
This is irony. Like I mentioned above the book boils down to behavioral finance and the efficient market hypothesis. Expansion of news media of business news would relate to semi-strong form of the efficient market hypothesis. Semi-strong form implies all public information is calculated into a stock’s current share price. Meaning that neither fundamental nor technical analysis can be used to achieve superior gains. The news media just increases the amount of information becoming public.
I did like the section about speculative bubbles, especially Shiller’s description of the Asian Flu Financial Crisis. He even mentioned that fundamentals, not human psychology, drive bubbles.
One final thing. I had some problems with Shiller’s survey method. In the book he conducted a survey of “current investors”, and used his results to draw conclusions about the “average investors” feelings towards the market. He also points to the media and the number of newspaper stories published about the market. It doesn’t take a genius to figure out that this type of research is speculative at best.