The Great And Obvious Appeal Of Irrational Exuberance

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Irrational exuberance.

Shiller published his book by that name in early 2000. He published the research showing that irrational exuberance is a real thing in 1981. So we have as a society had plenty of time to develop a battle plan aimed at overcoming it.

The Truth About Irrational Exuberance

The truth is, the problem is worse than ever. From 1996 forward, we have seen the worst stock prices in the history of the U.S. market. We have now identified the biggest risk of stock investing (I co-authored research with Wade Pfau showing that investors can reduce the risk of stock investing by nearly 70 percent by becoming open to practicing market timing when needed to keep their risk profile stable in the face of rising stock prices).

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Our collective response to Shiller’s amazing research has been a giant shrug of the shoulders. We like our irrational exuberance. We have no intention of engaging in serious efforts to rein it in.

Why do we like it so much? If it is high stock prices that make stock investing risky, why do we always push them up so high? Why don’t we all resolve to engage in the amount of market timing needed to keep stock prices at reasonable levels?

I attended a 12-step meeting for five years to cope with the disintegration of my marriage. About half of the people in the group were recovering alcoholics. They were smart, kind, hard-working, pleasant people.

They would often tell hair-raising stories of things that they had done to themselves and to their loved ones during their drinking days. “Why?,” you would ask yourself. Why would anyone behave so self-destructively?

Drinking makes you feel good. Not in the long term. Only in the short term. But that’s the explanation. Living life can be a hard business at times and alcohol can offer a respite. It’s an illusion. Drinking often comes with a terrible price-tag attached. But there’s a reason why people turn to it.

Get Rich Quick Investment Strategies

So it is with Get Rich Quick investment strategies. With Buy-and-Hold. With irrational exuberance. Letting stock prices get out of hand can never pay off in the long run. But the people who refuse to lower their stock allocation when prices get out of hand are not foolish people. My experience is that they are almost always smart people. Smart people who have developed an addiction to self-destructive behavior.

Stock drunk. That’s a term that I came up with years ago to describe the phenomenon. Buy-and-Holders don’t like it when I use that term. I understand why. It sounds insulting. But it is not my intent to insult. My intent is to understand and to describe. If we cannot name the thing that is causing all the trouble, we will never be able to overcome that thing.

Irrational exuberance is a devilish customer. We won’t overcome it by keeping Shiller’s book stocked in the libraries but holding back from discussing openly and frankly what it tells us about the need to go to battle with our inner desire to have something for nothing, the Get Rich Quick urge that drives all this business about not needing to change our stock allocation when prices go nuts.


Have you ever heard anyone else talk like this? Use terms like “stock drunk” to explain today’s CAPE value? It’s not done. That's why the CAPE value is so high. That doesn’t just happen. It happens because there is something inside us that lets it happen, that wants it to happen. We are all stressed financially. Each and every one of us. The phony gains that appear on our portfolio statement in the form of irrational exuberance ease those concerns. That’s the story.

Buy-and-Holders offer more complicated explanations of high stock prices. Something happened to interest rates. There are new technologies coming off the line. Those sorts of things play a role in generating stock gains that are real, the non-irrational exuberance gains. But the irrational exuberance gains result from that desire we all possess for something for nothing.

We find that desire embarrassing. So we don’t talk about it much. It’s the big secret of stock investing. I think we need to talk about it more if we are to gain a better handle on it and thereby to go to battle with our terrible addiction.

Rob’s bio is here.