Irrational Exuberance
I.INTRODUCTION:
Irrational exuberance means wishful thinking on the part of investors that blinds us to the truth of our situation (definition based on the book of Yale professor Robert Shiller) or can be simply understood as the overvalue/undervalue of the market because of irrational thoughts.
The word irrational and exuberance themselves are not new, but they are first combined and used by Mr. Alan Greenspan- former Federal Reserve Board Chairman in his comments on December 5th, 1996.
What interest me is that after Mr. Alan Greenspan’s speech, the market did actually react according to what is called irrational exuberance. We can look at the table below to see the epidemic phenomenon in the market at that time:
Country Percentage decrease
Japan Nikkei index 3.2%
Hong Kong Hang Seng 2.9%
Germany DAX 4%
Britain FT-SE 100 4%
USA Dow
Jones Industrial Average 2.3%
These facts makes the words “irrational exuberance” quickly became Greenspan’s most famous quote—a catch phrase for everyone who follows the market.
However, the situation in the market was not a downward trend as the table shows, actually the economy situation between 1994-1999 was very splendid, not to say wonderful.
- The Dow Jones Industrial Average stood at around 3,600 in 1994, by 1999, it had passed 11,000, more than tripling in five years.
- The stock market valuation in Germany, Italy, Spain and United Kingdom roughly doubled.
- Stock market in Asia (such as Hong Kong, Malaysia, Singapore, South Korea, Japan) also made spectacular gain.
Therefore, we have credence evidences to believe that sometimes, the whole market movement is just the surface of a more sophisticated problem, or say, that the movement is just fakely- created because of irrational decisions from a mass of investors.
As we all know economics is the study of allocating scare resources, forecasting market movement, and managing risk. However, to do all these functions, the economists need to understand the
Irrational exuberance means wishful thinking on the part of investors that blinds us to the truth of our situation (definition based on the book of Yale professor Robert Shiller) or can be simply understood as the overvalue/undervalue of the market because of irrational thoughts.
The word irrational and exuberance themselves are not new, but they are first combined and used by Mr. Alan Greenspan- former Federal Reserve Board Chairman in his comments on December 5th, 1996.
What interest me is that after Mr. Alan Greenspan’s speech, the market did actually react according to what is called irrational exuberance. We can look at the table below to see the epidemic phenomenon in the market at that time:
Country Percentage decrease
Japan Nikkei index 3.2%
Hong Kong Hang Seng 2.9%
Germany DAX 4%
Britain FT-SE 100 4%
USA Dow
Jones Industrial Average 2.3%
These facts makes the words “irrational exuberance” quickly became Greenspan’s most famous quote—a catch phrase for everyone who follows the market.
However, the situation in the market was not a downward trend as the table shows, actually the economy situation between 1994-1999 was very splendid, not to say wonderful.
- The Dow Jones Industrial Average stood at around 3,600 in 1994, by 1999, it had passed 11,000, more than tripling in five years.
- The stock market valuation in Germany, Italy, Spain and United Kingdom roughly doubled.
- Stock market in Asia (such as Hong Kong, Malaysia, Singapore, South Korea, Japan) also made spectacular gain.
Therefore, we have credence evidences to believe that sometimes, the whole market movement is just the surface of a more sophisticated problem, or say, that the movement is just fakely- created because of irrational decisions from a mass of investors.
As we all know economics is the study of allocating scare resources, forecasting market movement, and managing risk. However, to do all these functions, the economists need to understand the