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1Fix the driver behind crashes, sound loss and screen glitches2Repair Windows errors before they cause bigger problems3Scan for outdated or missing drivers - takes under a minuteIrrational exuberance is investor enthusiasm that feeds on rising asset prices and can help push them beyond levels that are sustainable or easy to justify. Alan Greenspan made the phrase famous in a 1996 speech while asking how policymakers could tell when asset prices had risen too far. Economist Robert J. Shiller later described irrational exuberance as the psychological basis of a speculative bubble.
What does “irrational exuberance” mean?
The phrase describes a pattern in which excitement about an asset helps drive its price higher, and the rising price in turn attracts more excitement and buyers. The concern is that prices may become difficult to justify by underlying value, leaving them vulnerable to a sharp or prolonged decline.
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Irrational Exuberance: Revised and Expanded Third Edition | $11.59 | Buy on Amazon |
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Irrational Exuberance | $17.15 | Buy on Amazon |
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Irrational Exuberance | $16.50 | Buy on Amazon |
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Irrational Exuberance: Second Edition | $19.30 | Buy on Amazon |
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Irrational Exuberance (00) by Shiller, Robert J [Paperback (2001)] | $24.96 | Buy on Amazon |
In Irrational Exuberance, Robert J. Shiller defines it this way: “Irrational exuberance is the psychological basis of a speculative bubble.” His account focuses on a feedback loop: rising-price news encourages enthusiasm; that enthusiasm spreads socially and strengthens stories that seem to explain further gains; more investors join, including some who have doubts about the asset’s real value but are drawn by others’ gains or the excitement of speculation. Shiller’s publisher-hosted excerpt sets out this definition.
The term does not mean that every rapid price rise is irrational, or that enthusiasm alone explains a boom. Nor does it supply a reliable real-time test for identifying a bubble. It describes a possible psychological and social force behind speculative pricing, not a precise valuation formula.
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Who said it, and what was the original quote?
Federal Reserve Chairman Alan Greenspan used the phrase in a December 5, 1996 speech, “The Challenge of Central Banking in a Democratic Society,” delivered at the American Enterprise Institute in Washington, D.C. His famous question was:
“But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”
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Irrational Exuberance
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The question was part of a discussion about price stability and monetary policy. Greenspan considered whether central bankers should pay attention not only to prices of goods and services being produced, but also to prices of claims on future goods and services, such as equities and real estate. He was concerned particularly about a financial-asset collapse if it threatened production, employment, or price stability. The speech asks how policymakers could recognize excessive price escalation; it does not announce a mechanical sell signal or claim that a particular market had been conclusively diagnosed. Read the Federal Reserve’s transcript of Greenspan’s 1996 speech.
What is Robert Shiller’s Irrational Exuberance about?
Shiller’s book examines speculative booms, their possible causes, and policy responses. Princeton University Press describes the revised and expanded third edition as covering stock and housing markets, with bond markets added, along with updated data and Shiller’s 2013 Nobel Prize lecture. The publisher’s 2015 trade catalog lists the hardcover as 376 pages, ISBN 978-0-691-16626-1. These details identify that edition; they do not establish current retailer availability or price. See the publisher’s book page and Spring 2015 trade catalog.
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The book offers historical examples rather than a simple rule for calling a market top. In its excerpt, Shiller reports that the Dow Jones Industrial Average first passed 10,000 in March 1999 and peaked at 11,722.98 on January 14, 2000; the excerpt describes the market level as having tripled in five years. These are nominal historical index figures reported in the 2015 edition, not current market data or proof on their own that prices were misvalued. The excerpt also cautions that inflation-corrected indexes do not tell the same simple story as nominal levels.
What are examples of irrational exuberance?
The U.S. stock-market surge of the 1990s
Shiller’s account of the 1990s U.S. stock-market run-up is an example used to discuss how rising prices and enthusiasm can reinforce one another. The Dow figures above show the scale of the period’s nominal rise, but a rising index alone cannot establish that the entire market was irrationally priced.
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Japan’s asset-price experience
Greenspan invoked Japan’s preceding decade as an example of asset values followed by an unexpected, prolonged contraction. In the speech, Japan illustrates the risk central bankers were debating; the reference is not a universal bubble test or a verdict on a current market.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Did Greenspan think his warning called for action?
In a March 31, 2009 Federal Reserve oral-history interview, Greenspan looked back on the phrase. He recalled that the stock market continued rising for four more years after his 1996 remark and said the Dow rose 80 percent, “as I recall.” He argued retrospectively that acting against the boom as a policy issue could have meant sacrificing substantial gains. This is Greenspan’s recollection and policy argument, not an independently verified return calculation or a settled conclusion about how policymakers should respond. The Federal Reserve oral-history interview records his account.
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How should investors use the phrase?
“Irrational exuberance” is useful as a warning to examine how expectations, social influence, and rising prices may be interacting. It is not, by itself, enough to show that a specific asset or market is in a bubble. Greenspan’s original question remains central: how can anyone know when enthusiasm has pushed values too far? The cited speech and book explain the concern and offer historical context, but they do not establish whether any market today meets that description.
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