With the wreckage still smoldering from the Great Recession, a Nobel Prize–winning economist once again revisits his 15-year-old, widely influential best-seller, which examined the nature of speculative bubbles.
When Fed Chairman Alan Greenspan used the phrase “irrational exuberance” to describe the 1996 booming stock market, he enigmatically hinted at a phenomenon at odds with the prevailing efficient market theory: that assets are always priced correctly, that “all financial prices accurately reflect all public information at all times.” Since then, shocking economic developments and converts to the powerful argument Shiller (Economics/Yale Univ.; Finance and the Good Society, 2012, etc.) first articulated in 2000 have conspired to thoroughly disconcert defenders of markets’ rationality. In explaining the origin and attributes of speculative bubbles, the author persuasively examines the structural factors—politics, technology and demography—underlying them, the cultural factors reinforcing them and the psychological factors driving market behavior. His groundbreaking use of disciplines other than economics—sociology, epidemiology, social psychology, communications and journalism—helps explain the mania or madness we associate with bubbles. Speculative bubbles, he insists, are very real, the result of “the combined effect of indifferent thinking by millions of people…motivated substantially by their own emotions, random attentions, and perceptions of conventional wisdom.” He fully updates his argument here, adding new material (a chapter on the bond market, his 2013 Nobel lecture) and augmenting the text to reflect developments since the 2005 second edition. He vacuums up all manner of cultural phenomena, from the important (rising income inequality) to the possibly significant (Google Glass) to the trivial (Kim Kardashian), to reinforce his thesis, and he writes expressively, whether explaining arcane economic issues or illustrating how the story behind Mona Lisa’s smile helps account for the painting’s astonishing market value.
A rare example of economic analysis, deeply respected within the discipline, wholly accessible to general readers.