Irrational prosperity

Author: (American) Shiller/Liao Li et al
Publisher:
Publish Date: 2004-11-01
Features: Mr. Shiller is like a prophet who understands Wall Street. He believes that investors are being influenced by irrational factors such as impulse, herd behavior, casual talk, intuition, the media, and the fear of falling behind. His theory provides a timely and reasonable explanation for the spreading unease in the stock market. — The New York Times (This book discusses) modern, classic, and serious economic rationality. Even if you are not an expert in this field, you can still enjoy it. — The Economist "2000's Best Book" Irrational Exuberance is a must-read for anyone interested in Wall Street. In today's America, from Greenspan to the cobbler in a small town, everyone should read it. — The Economist It is the hottest book of the year. — Business Week The title of this book is derived from a quote by Alan Greenspan, then Chair of the Board of Governors of the Federal Reserve, in a speech at the Hilton Hotel in Washington D.C. in late 1996, when he discussed the bubble in U.S. financial asset prices. Since then, many scholars and experts have noticed the investment bubble phenomenon in the U.S. stock market caused by excessive speculation. The British magazine The Economist has even predicted multiple times that the U.S. investment bubble would burst. However, whenever signs of a downturn in the U.S. stock market appeared, another speculative boom would emerge, temporarily supporting the market until recently when signs of a soft landing emerged. In the 1990s, the U.S. stock market set new highs, with investors in a feverish state and speculation at its peak. Even famous stock market analysts predicted that the Dow Jones index would reach 50,000 points. The author of this book, Shiller, is a professor at Yale University and also an investor in the U.S. stock market. Based on years of analysis and research on the U.S. stock market's bull market, as well as historical precedents of major stock market fluctuations, he calmly analyzes the factors behind this period of prosperity in the U.S. stock market. However, most of these factors cannot be explained by the general theory of efficient markets, because the speculative greed of people in the stock market is an irrational nature. The book presents a thorough and incisive analysis, prompting deep reflection. In fact, all economists trained in have a preconceived assumption that all economic decisions are made rationally. The classical economic school once set up a hypothetical figure in the field of economics called the "economic man" (Homoeconomica). If this "economic man" were in modern human society, he would be emotionless and self-interested, always prioritizing his own maximum benefit; therefore, he would not make the emotional mistakes of ordinary people. Every penny he spent and every effort he exerted would be carefully calculated. Similarly, economists also believe that a perfect market is a "perfectly competitive market," where there are numerous buyers and sellers, so no one can control the price with their trading volume; information in the market is fully circulated, and any news is quickly communicated to all participants, immediately and effectively reflected in market prices. This is also an important assumption of the efficiency market in financial markets. However, just as ordinary people are not perfectly rational "economic men," the market cannot fully meet the conditions of a "perfectly competitive market." Therefore, once "irrational" investors and "irrational exuberance" markets appear, it is difficult for economic doctrines to explain their existence; similarly, the financial policies formulated by these people cannot solve economic problems under irrational thinking. Shiller, based on economics, psychology, and sociology, and through various statistical analyses and historical research, seeks to find the reasons behind the emergence of the U.S. investment bubble in the 1990s. Americans knew that if the stock market bubble burst, all wealth would be lost, yet they believed they would not be the last to fall, always thinking they could sell to someone even more unlucky before the big drop, and quickly forgot past losses once the stock price rebounded. This phenomenon seems very similar to the state of our stock market. Shiller pointed out that to attract investors, media stock stars use aggressive marketing to superficially emphasize some superficial aspects, giving the public the impression that the stock market will only rise and never fall. However, in reality, they may not grasp the pulse of the stock market. Our country also has many stock market analysts like this. Officials, in order to boost the stock market, even resort to the argument that "the stock price is very low, not buying will be regrettable," to mislead investors. In fact, like investors, they are also unclear whether the stock price will rise or fall next week, resulting in those who listen to their advice being trapped. Even if the stock price fluctuation range is reduced and the rules of the game are changed, it cannot stop the downward trend of the stock price. From this perspective, perhaps our country's regulatory officials can learn even more from this book. The higher the stock market rises, the heavier the fall will be—a principle that cannot be overturned. However, when the stock price is rapidly soaring, there are always many arguments to "prove" that the stock price will not fall. In the 1920s, before the stock market crash, there were so-called "strong hands," meaning buying pressure was increasing, prices were rising continuously, and the market had enough support to prevent a fall. In the 1950s, someone pointed out that the U.S. had entered the "new capitalism" era, with 17 million stockholders, employees holding stock, turning workers into capitalists, and thus the stock price would not fall. In the 1960s, the media constantly promoted the stock market as the best investment channel, not only for preserving value, combating inflation, and avoiding risks, but also for participating in the fruits of economic growth, naturally leading to continuous rises in stock prices. In the 1990s, the argument was that in the new economy, high technology was constantly innovating, costs were declining, and profits were rising, so the stock price would not fall, and internet stocks also overreacted to the unlimited prospects of the future internet market. However, all these reasonable arguments were shattered with the bursting of the market bubble. The reason is that the purpose of these arguments was to rationalize the "overvalued" stock prices under irrational speculation, making investors feel at ease about chasing higher prices. People born after the post-war baby boom, in the 1990s, continued to chase higher stock prices, believing that "this time is different" (TTID: This Time Is Different), that the stock price would not fall, and were the main force pushing the Dow Jones index past 10,000 points. However, starting this year, U.S. stocks have been falling step by step, showing that the principle of "the higher the rise, the heavier the fall" still exists, though the timing may vary. Taiwanese investors, after the bursting of the stock market bubble in 1990, have experienced multiple stock market downturns, and their feelings about this book are likely even deeper. In Chapter 6 of the book, Shiller writes that several of Taiwan's stock market crashes ranked among the world's top. From 1989 to 1990, the stock market fell by 74.9%, making it the world's largest percentage decline in that year; among countries with larger five-year stock market declines, Taiwan ranked seventh and 27th. However, Taiwanese investors have never learned from their failures, and the government has always believed that "the stock market's rise and fall are the responsibility of officials," giving investors the wrong idea that "the stock market will rise and never fall, and if it really falls, the government will step in to save it." The stock market mechanism has also been designed to support rises rather than falls. But Taiwan's stock market bubble has repeatedly burst and been inflated, and the real reason is the problematic role of the government. Unfortunately, the current stock market has fallen to a point where it seems even the national security fund cannot help, and investors must face the existence of market mechanisms. At this time, Shiller's book becomes even more useful. In summary, this is a good book that analyzes the irrational investment behavior in the stock market. It overturns general investment theories, pointing out that the "chaos" that 20th-century financial scholars in the securities market could not explain was due to the flawed assumptions in their theories. Of course, it also predicts the fate of the U.S. stock market's speculative bubble. For Taiwanese investors, after reading this book, they can have a more "rational" explanation for the "irrational" aspects of the stock market in our country.