Shiller’s Book Title Does Not Have An Exclamation Point At The End

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Irrational exuberance – it’s a bad thing. Shiller’s book title does not have an exclamation point at the end.

It’s a silly thing to say. Of course irrational exuberance is a bad thing. Who ever thought otherwise?

Only everyone.

How To Combat Irrational Exuberance?

I entered into the Google search engine a search for “how to combat irrational exuberance.” I can’t say that it turned up anything that knocked my socks off. The most relevant comment was one by Former Federal Research Chairman Alan Greenspan, who is the person who originated the term.

“Once a bubble emerges, it is difficult to do anything to stop it that won’t have a major negative impact on the economy,” Greenspan said. “The best thing to do is to let it run its course and address the consequences when they occur.”

I suppose. There’s nothing in that statement that I find to be flat-out wrong. But I certainly don’t find the statement satisfying. Say that there really is such a phenomenon as irrational exuberance (I believe that there is).

That means that every investor who holds stocks is being misled as to the lasting value of his portfolio each time he takes a look at his portfolio statement. It means that every retiree is at greater risk of suffering a failed retirement than he would permit himself to be placed had he only been aware of the realities.

It means that our entire economic system is in jeopardy of collapse when the irrational exuberance disappears into the mist (as it always eventually does) because that means that trillions of dollars of spending power will be disappearing into the mist as well.

The Cancer Of The Personal Finance World

Irrational exuberance is the cancer of the personal finance world. How would we react to aa statement by a famous doctor that: “Once a cancer emerges, it is difficult to do anything to stop it that won’t have a negative effect on the body of the patient”?

That’s true enough. Cancer treatments are rough on the patient. But I believe that as a society of people we respond in a more intelligent and caring way to the discovery of the presence of cancer than we do to a discovery of the presence of irrational exuberance.

Stock prices have gone more out of control in the days since Shiller published his book than they ever did in the days before his Nobel-prize-winning research taught us about the power of this life-negating force to destroy our hopes for financial independence. It’s almost as if we responded to Shiller’s amazing research as if it were a challenge.

“You say that irrational exuberance has been destroying human lives for as long as there has been a stock market to invest in? We’ll show you irrational exuberance! We’ll show you destroyed lives!”

Is it intellectually difficult to figure out how to combat irrational exuberance, how to make it go away and never come back? It does not seem so to me.

The thing to do would be to let investors know how much of their portfolio is real (how much of it is the product of genuine economic growth) and how much of it is the phony irrational exuberance stuff (how much of it is the effect of the CAPE value rising above 17) and then tell them how much sooner they would be able to retire if they lowered their stock allocation when the effect of irrational exuberance in the market became strong enough to cause their risk profile to get out of whack.

That would cause investors to lower their stock allocation when prices got too high and the diminished demand for stocks would pull stock prices back to reasonable levels. Irrational exuberance problem solved!

Greenspan is right that doing that after prices had already gotten out of control would bring on a recession. The solution to that problem is to do it before a bubble forms, before the irrational exuberance gets too out of control, to just tell people the realities of stock investing as a matter of course.

That’s market timing!

It is. And I dare say that it would be a very good thing to make it the standard way of advising people putting their retirement money into stocks. Better than waiting for the cancer cells to invade the organs of our economic body.

There’s no exclamation point at the end of the title of Shiller’s book. Irrational exuberance is a very bad thing. We need to start acting in accord with that basic reality of the stock investing world.

Rob’s bio is here.