Irrational Exuberance

Quick Thoughts:
  1. This is an older book, originally issued in 2000, updated and re-issued in 2005, and then re-issued with no substantial update in 2009.  The timing for the 2000 and 2005 releases is pretty incredible given that the book is basically about stock market/housing bubbles.  He warns that the markets are significantly over-valued.  And he was right.
  2. What's really interesting about this book is how the author blends work on behavioral economics with finance.  Students of finance are always introduced to the Efficient Market theory which is basically the idea that investors are rational and will make rational plays in the market.  Frankly, its a core assumption for much of the hard mathematical work of finance.  So this book takes finance and blends it with the core assumption of behavioral economics that people will behave irrationally.
  3. So you can guess where this going.  Financial markets can and will behave irrationally.  The author is pretty clear that we can't know the exact reasons for the creation of "bubbles", certainly not with mathematical precision.  But, he does make it clear that certain behaviors repeated over and over again, make it a certainty that markets will become over-valued.  He adds that once its realized by enough people, watch out below.
  4. The book does a good job of chronicling historical market run-ups and how they are treated by the greater investing public and the press.  He also takes studies in behavioral economics and uses them to illustrate specific irrational aspects of market history.  Then he has his own studies which he cites that very convincingly demolish the idea that financial market participants are fully rational in their trades.
  5. The book is definitely on the dry side.  I'm lucky to be reading it on a commute with no significant distractions.  I wouldn't make this beach reading.  That said, I think the book's points are well taken and I'd definitely recommend it to anybody who is playing the investment game.  His thoughts are excellent and should make you ask key questions about your investment strategy.  It will also help to make you more aware of the forces in the overall market that can really damage your portfolio.

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