What is 'Irrational Exuberance'

Irrational exuberance is unsustainable investor enthusiasm that drives asset prices up to levels that aren't supported by fundamentals. The term "irrational exuberance" is believed to have been coined by Alan Greenspan in a 1996 speech, "The Challenge of Central Banking in a Democratic Society." He said that low inflation reduces investor uncertainty, lowers risk premiums and implies higher stock market returns.

BREAKING DOWN 'Irrational Exuberance'

"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? And how do we factor that assessment into monetary policy?" asked Greenspan.

Greenspan gave this speech near the beginning of the 1990s dotcom bubble, a textbook example of irrational exuberance. "Irrational Exuberance" is also the name of a 2000 book by economist Robert Shiller that analyzes the broader stock market boom that lasted from 1982 through the dotcom years. Shiller's book presents 12 factors that created this boom and suggests policy changes for better managing irrational exuberance. The book's second edition, published in 2005, warns of the housing bubble burst.

RELATED TERMS
  1. Bubble Theory

    A school of thought that believes that the prices of assets can ...
  2. Fed Speak

    A phrase used to describe former Federal Reserve Board Chairman ...
  3. Greenspan Put

    A description of the perceived attempt of then-chairman of the ...
  4. Pale Recession

    A phrase used in May 2008 by former Federal Reserve Board Chairman ...
  5. Infectious Greed

    A phrase used in his July 2002 testimony before the Committee ...
  6. Blowoff

    A term in technical analysis that refers to a sharp price increase ...
Related Articles
  1. Insights

    4 Reasons Why Irrational Exuberance Lasts Awhile

    Discover four reasons why markets sometimes exhibit irrational exuberance and form asset bubbles and why those bubbles are so pernicious.
  2. Investing

    When The Federal Reserve Intervenes (And Why)

    The Federal Reserve doesn't interfere with the economy every time it flounders. Find out more here.
  3. Financial Advisor

    Why Greenspan Dislikes Negative Interest Rates

    Alan Greenspan is not a fan of negative interest rates, but another former Fed chair disagrees. Who is more likely to be correct and why?
  4. Insights

    Alan Greenspan: 19 Years In The Federal Reserve

    Follow the economic glories and bumbles in the career of the previous Fed chair.
  5. Insights

    Economic Meltdowns: Let Them Burn Or Stamp Them Out?

    Whether the Fed should intervene in market bubbles is up for debate. Learn about both sides here.
  6. Investing

    10 Books Every Investor Should Read

    Want advice from some of the most successful investors of all time? Check out our reading list.
  7. Investing

    Behavioral Finance

    Learn the science behind irrational decision making and how you can avoid it.
  8. Insights

    Alan Greenspan Says Brexit Is Worse Than 1987

    The former U.S. central bank chief says Brexit is the "worst period, I recall since I've been in public service."
  9. Investing

    These Two Stocks Are The Cornerstone For Any Tech Portfolio

    When I started in the investment biz twenty years ago, the Tech Bubble was building engine pressure. When then Fed Chairman Alan Greenspan referred to the mania as "irrational exuberance", he ...
  10. Investing

    An Introduction To Behavioral Finance

    Curious about how emotions and biases affect the market? Find some useful insight here.
RELATED FAQS
  1. What is a Greenspan put?

    Only five months into his tenure as Federal Reserve Chairman, Alan Greenspan faced his first crisis: the October 1987 stock ... Read Answer >>
  2. What does 'froth' mean in terms of the real estate market?

    On May 20, 2005, while addressing the Economic Club of New York, the now former Federal Reserve chairman Alan Greenspan commented ... Read Answer >>
  3. How successful have "dove" Federal Reserve heads been in the past when it comes to ...

    Review a short history of "dovish" leaders of the Federal Reserve, who use U.S. monetary policy to reduce unemployment through ... Read Answer >>
  4. What are the typical factors that cause the economy to repeat a boom and bust cycle?

    Read about the fundamental causes of the economic boom-bust cycle, why some recessions are necessary and why asset bubbles ... Read Answer >>
  5. What lessons did the tech bubble crash give to investors in the Internet sector?

    Learn how investors contributed to the dot-com bust and how Internet services and investing has changed since the market ... Read Answer >>
  6. What do people mean when they say there is a "bubble" going on in the market, such ...

    A financial "bubble" refers to a situation where there is a relatively high level of trading activity on a particular asset ... Read Answer >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center