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Readers reviews of Irrational Exuberance

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I found this book disappointing. He is firmly rooted in the quality of PE ratios and Dodds and Graham style analysis. The base assumption is that speculative exuberance is somehow irrational. While we continue to divide market reactions into rational and irrational we construct the tools required for effective analysis and understanding. Using Shillers understandings it was irrational to invest in Enron because the measures of performance used were classic. It was irrational to invest in EBay because the classic measures could not be reasonably applied. He claims recent high valuations in the market have come about for no good reason. High prices are a result of indifferent thinking.

The market is always rational, buy also always intensely emotional. Unless we understand the role that emotions play in analysis, and subsequent action, we cannot develop an effective trading edge. The rational analyst applying classic PE analysis has an emotional belief that this is the correct approach. Shiller certainly holds this belief with a high level of emotion.

The new trader who buys a stock at the end of a fast momentum move has given it a great deal of research. His research is rationally organised, but he interprets the results in an emotional way. His decision to buy is rational, but based on a different type of analysis.

Ultimately Shiller fails to convince or enlighten because he fails to address one set of questions.
In a world of the rational analysis which characterises financial industry professionals why were there so few sell recommendations prior to the tech market collapse? Even more importantly, why were there so few sell recommendations as the extent of the collapse unfolded over weeks and months.

Is it a rational response to hold onto blue chip stocks as they lose more than half their value? Holding is not irrational? It is emotional. Without this understanding the book offers little insight into market behaviour.



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