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Irrational Exuberance

Robert Shiller published a book named “Irrational Exuberance”. In this book, he studied the factors, which facilitates the emergence of inflation and...

Written by Wallebi Author · 4 min read >
Irrational Exuberance

Robert Shiller published a book named “Irrational Exuberance”. In this book, he studied the factors, which facilitates the emergence of inflation and bubbles in the market. It means, when the price starts to grow, several factors will boost the price in order to grow higher. Meanwhile, he discusses the mechanisms, which amplify these factors. These mechanisms result in facilitating market inflation to be stronger and even more consistent. In addition, he discusses the psychological and cultural impacts, which move along irrational decision-making. It means, that he explains the effect of human instincts, which use to making irrational behavior as rational. Finally, he provides solution in order to prevent struggling in market bubbles, which are highly risky.


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Theories, which proposed in this book consist of financial and economical behavior. Actually, financial behavior is a part of technical analysis, which helps to understand investors and institutions behavior. What does it encourage one to buy or sell a stock? How do investors manage risks and financial lost? Why do highly risky bubbles appear in the market and suddenly disappear?

Irrational Exuberance definition

In this article we are trying to collect crucial factors. These factors divided into two groups. The first is structural factors, which consists of 11 factors, and we will explain them one by one. The second consists of psychological factors. Finally, we will explain the amplifying mechanisms.

Irrational exuberance; Structural factors

Shiller explains the factors, which caused stock price surge in the United States stock market from 1995 to 2000. Although Shiller obtained these factors by studying the United States stock market, one can use them either in cryptocurrency market or in any other financial markets. The factors are as below:

Impact of culture

Explosion of capitalism and social ownership encourage stock market investment. The reasons such as institutions shrinkage in size and reduction in labor, they all motivated people to take control of their own destiny and create an entrepreneurial spirit. In addition, many organizations tied their employees’ salary to the company shares.

Money is considering as a measurement of success in the society due to the political and cultural changes. This attitude toward money is increasing continuously. In today society, people who are running a successful business attract more attention than scientists and artists. Actually, having more money is a motivation to get into different financial markets.

Impact of technology

Information technology is at the forefront of the today’s world. Mobile phones invented in early 1980. Then, the considerable increase in the United States stock took place. It was in middle of 1990 decade that Internet introduced to the world and became popular shortly just in 5 years. As a result, many investors considered the new changes as game changers and it resulted in an explosion in stock market.

Impact of financial policy

Financial policies in lowering interest rate will result in transfer of capital from banks to stock market. In addition, it developed industrialized countries such as the United States, central bank assistance at the time of price declines, and reduced the risks of investment.

Impact of population

The world experienced a population explosion after WWII, which resulted in increasing the population between 35-55 ages in 2000. However, Shiller does not see a direct link between population explosion and stock market inflation. In fact, he believes perception and sentiment of people about the impact of population explosion could result in stock market bubbles.

Impact of media

Increasing the number of media, which are active in the business field, will undoubtedly attract public attention to stock market. Emergence of specialized magazines and newspapers in economics and stock exchanges, replacement of interesting stories with boring news and advertisements increase the mass appetite to join the market and make a profit.

Impact of famous analysts (gurus)

Predictions and estimations of some analysts may not be totally true because most of them are in doubt to recommend selling of a company’s share. The first reason is that there is a possibility that they could no longer have access to key financial data. The second is that if everyone begins to sell, then the companies will experience significant lost or even bankrupt. Consequently, they analyze the market in a way to increase optimism in the market. The effect would be that many people will join the market to invest in.

Impact of unions and financial institutions

Increasing in defined-benefit plans, reduction in number of unions and large manufactures will impact the mass in order to control and manage their assets. As a result, it increases the contribution of them in stock market.

The number of mutual funds is increasing continuously. Actually, transferring money from pension funds to mutual funds increases the volume of inflation bubbles.

Impact of inflation

A slight inflation creates the illusion of getting rich. Shiller’s studies indicated that in public opinion, social welfare and economic well-being are linked to inflation. This public way of thinking raises expectations from economy and stock market.

Trading volume explosion increases inflation bubble. Actually, the growth of interest in the stock market and dramatic decrease in amount of commissions facilitate the increase in trading volume. Meanwhile, online stock trading increases the public interest in this field.

Irrational exuberance; Psychological factors

Shiller claims that there is a human tendency to “trust other people’s opinions”. In fact, the majority of people rely on “intuition” in order to make decisions for investment. However, making decision is not based on relying on statistics. Instead, investors make decisions based on other people’s opinions. One makes decision based on ” positive stories ” or the stories, which seem logic. In fact, people receive information from the same sources. Consequently, there is no evidence to show that they make decisions individually. Basically, when the majority receive similar news, they act the same as others. Therefore, it creates a 100% same mentality.

Amplifying mechanisms

Shiller claims that in addition to those above factors, there are mechanisms, which amplifies these factors. The first mechanism that he talks about is a change in investors behavior towards the stock market. Over the time, long-term investment attracts the attentions.

The second is that Shiller comes to this conclusion that public interest and social awareness of the stock market has reached a new level. The more public interest and social awareness increases, the more money will flow to these markets. On the other hand, media amplify this atmosphere.

The third and last mechanism explained by Shiller is creation of a link between capital increase and public attention.

It is notable that continuous price growth, attracts public attention. The more people are attracted to stock market, the more prices will surge and this cycle repeats continuously.

In addition, the more media reflect news about price growth in stock market, the more popular it will have been become and prices increase respectively. Shiller believes that the third mechanism is a Ponzi scheme trick, which happens naturally. Ponzi scheme is a profit scheme, which pays the interest of investors from new investors who join the scheme. In fact, a Ponzi scheme does not require interrupting any business or financial activity.

Irrational exuberance; Conclusion

Shiller explained several factors, which affect decision-making in investing during market bubbles. Most of these factors are still useful. However, we did not explain all Shiller’s factors in this article. Although these factors achieved from studying history of the United States stock market, they are still reliable.

By studying the market one can realize that not only these factors and mechanisms are useful to analyze the market during inflation, but also they are practical during market crash. Once media spread news about market crash, the majority of investors begin selling their stocks with the lowest possible price. This price reduction confirms news and this cycle will repeat continuously.

Written by Wallebi Author
Author and analyst in the field of cryptocurrency Profile

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