Irrational Exuberance by Robert Shiller
Shiller puts US stock valuations in historical and global comparison, cataloguing 12 precipitating factors for the 1990s US bull market.
This leaves the door open for him to write a book on crashes and their precipitating factors.
Plus ca change....
Precipitating factors(reorganized and critiqued):
- The arrival of the Internet at a time of solid earnings growth
other investments look less sexy, so cash is diverted to equities. We demand a reason for valuations to not be as they previously were; big complex things like the
Internet seem to work as well as the then-unknown reasons for strangely random markings on tulips.
- The Baby Boom and its perceived effects on the market
non-effect; our saving rate wasn't higher; people demand reasons for a market to go up, so we
deliver them, hence the 'perceived'.
- Triumphalism and the decline of foreign economic rivals
new sources of demand for products open up
- A Republican Congress and capital gains tax cuts
more money available for re-investment
- The expansion of defined contribution pension plans
people choose investments instead of fund managers, involving more people
- The growth of mutual funds
maybe; don't know
- The decline of inflation and the effects of money illusion
maybe; would like to see a long-term multi-country study on inflation and asset allocation
- Expansion of the volume of trade: discount brokers, day traders, and twenty-four-hour trading
seems to not have an first-order effect, the number of shares available (supply) and the number of simultaneous shareholders (demand) should determine price, not the
number of transactions
- The rise of gambling opportunities
seems negative; dollars spent gambling don't go in your retirement account
- Cultural changes favoring business success or the appearance thereof
I would classify this as an always available feedback engine, the competition for
scarce resources means that it should always be an effect
- An expansion in media reporting of business news
feedback engine, same as above
- Analysts' increasingly optimistic forecasts
feedback engine as try to outdo each other for accurate forecasts in a market that increasingly diverges from reality
Most advertising is really not the presentation of important facts about the product but
merely a reminder of the product and its image. Given the heightened media coverage of investments,
a stock market boom should come as no greater suprise than increased sales of the latest sports utility vehicle
after a major ad campaign.
The history of speculative bubbles begins roughly with the advent of newspapers.
in 1989, when the Japanese Nikkei index was at its peak, our questionnaire surveys
found that the average Japanese institutional investor expected a 9.5% increase in the Nikkei in the following
year, while US institutional investors expected a 7.7% decrease