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The Term “Irrational Exuberance” Is a Synonym for “Scam”

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Irrational Exuberance was a good title for Robert Shiller’s book “revolutionizing” (that word appears in the subtitle) our understanding of how the stock market works. It gets to the key question. The Buy-and-Hold Model is rooted in a presumption that investors are rational. If that were so, stock prices would only rise when there was an increase in economic productivity. Shiller’s term makes the point that we cannot count on gains greater than those usually produced by economic gains to remain in place.


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Scary High CAPE Value

So the term “irrational exuberance” does the job intellectually. However, it has not brought about the emotional change in how we all think about the market that we need to see to have a market that functions properly. Today’s CAPE value is scary high. How is it that a society of investors that has been put on notice that gains above those that would be in place if the CAPE value were 16 has been able to remain in love with stocks while the CAPE travelled to the mid-30s?

We tune out what we know. We ignore Shiller. We don’t debate him. His research is too well-executed for us to believe that debate would lead to Shiller being refuted. So ignoring his work has been the favored strategy for Buy-and-Holders for many years now. I think that those of us who believe that Shiller’s Nobel-prize-winning research is legitimate research need to be more blunt in our statements of what his research signifies if we hope to break through the wall of denial.

If more than 50 percent of today’s stock market value is irrational exuberance, millions of people who believe that they are financially prepared for retirement in reality are not.

If more than 50 percent of today’s stock market value is irrational exuberance, hundreds of thousands of businesses which today appear to be in good shape will be going under when that irrational exuberance disappears because the loss of those trillions of dollars of consumer spending power will cause an economic contraction.

Is Irrational Exuberance A Scam?

If more than 50 percent of today’s stock market value is irrational exuberance, our political leaders are not able to make fully informed decisions on most of the policy questions before them. It’s not possible to make effective choices without being aware of the basic realities and a force that causes millions of peoples’ wealth to be wildly misreported rules out such awareness.

Irrational exuberance is a scam. Is that not so?

Even people who are generally sympathetic to Shiller’s ideas usually do not refer to it as such. People think of irrational exuberance as one more thing to take into consideration when settling on a stock allocation. It’s really much more than that. Shiller’s showing that there are times (like today!) when more than half of the wealth held in the stock market is artificial is a cry of “foul!” as to the entire working of the market. For so much false wealth to be created, pretty much all of us had to be in on the scam. We are not talking about some small act of corruption. This is pervasive.

Newspapers report on the stock market every day. Rarely do they point out that more than half of the wealth in it is artificial. There’s a sense in which the newspapers aid the scam. They certainly tolerate it. The same is true of policymakers. And of the authors who write books about the stock market. And of the professionals who advise people on how to invest their retirement money. And on and on.

You cannot work in this field unless you are in on the scam. If someone were to blow the whistle on it, the thing would collapse. Would you want to be the person responsible for causing trillions of dollars of wealth to disappear into thin air? I write about these matters all the time. But even I don’t want to be responsible for that. I sometimes pull my punches. I sometimes cannot bear to state things as clearly as my brain sees them.

Buy-And-Holders Think Of Bull Markets As An Economic Phenomena

Bull markets depend on pretty much everybody participating and pretty much nobody calling out the scam. The Buy-and-Holders think of them as an economic phenomena. But bull markets are really a social phenomenon. They are happy events for so long as they are widely perceived as happy events and collapse when a significant number of us come to see through them. “Con” is short for “confidence game.” A bull market and the irrational exuberance that one generates are cons.

They are a weird kind of con, to be sure. They are a con that we work on ourselves. Shiller’s book is carried in libraries and sold in bookstores. His research is published in peer-reviewed journals. He appears on television interviews. Why do we still count on irrational exuberance to finance our retirements?

It is emotionally satisfying to do so. So long as everybody goes along, it works. We are on track to having enough money to retire. The numbers on our portfolio statement say so! What does irrational exuberance have to do with anything? It’s the title of a book. It’s a concept that those sad bears talk about. It’s not the real world. The real world is the con that we all believe in and protect from criticism.

Rob’s bio is here.