Irrational Exuberance

AAA

DEFINITION of 'Irrational Exuberance'

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.

INVESTOPEDIA EXPLAINS '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. Icarus Factor

    The term Icarus factor describes a situation where managers or ...
  2. Alan Greenspan

    The former chairman of the Board of Governors of the Federal ...
  3. Herd Instinct

    A mentality characterized by a lack of individual decision-making ...
  4. Overvalued

    A stock with a current price that is not justified by its earnings ...
  5. Federal Reserve Board - FRB

    The governing body of the Federal Reserve System. The seven members ...
  6. Greater Fool Theory

    A theory that states it is possible to make money by buying securities, ...
RELATED FAQS
  1. How do I build a trading strategy after spotting a breakaway gap pattern?

    A breakaway gap is often seen after a company releases a big news announcement that earnings were much better than anticipated. ... Read Full Answer >>
  2. How do investors "chase the market"? It this a bad thing?

    Generally , an investor "chases the market" when he or she enters into a highly priced position after the stock price has ... Read Full Answer >>
Related Articles
  1. Forex Education

    Playing The Gap

    Learn how you can earn money by analyzing the disruptions in normal price patterns.
  2. Active Trading Fundamentals

    How The Power Of The Masses Drives The Market

    Market psychology is an undeniably powerful force. Find out what you can do about it.
  3. Economics

    When The Federal Reserve Intervenes (And Why)

    The Federal Reserve doesn't interfere with the economy every time it flounders. Find out more here.
  4. Options & Futures

    Market Problems? Blame Investors

    Investors are only human, and their irrational behavior can often move the market.
  5. Options & Futures

    Silver Thursday: How Two Wealthy Traders Cornered The Market

    Find out how the largest speculative attempt to corner the market went awry.
  6. Economics

    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.
  7. Budgeting

    The Greatest Market Crashes

    From a tulip craze to a dotcom bubble, read the cautionary tales of the stock market's greatest disasters.
  8. Active Trading Fundamentals

    20 Rules To Trade More Professionally

    Break free from the pack and join the professional minority with an approach that raises your odds for long term prosperity.
  9. Chart Advisor

    These 4 Swing Trades Could Place You in the Money

    Take advantage of moves both higher and lower with swing trades based on trend channels.
  10. Trading Strategies

    You'll Lose Profits Without This Trading Strategy

    A trading edge defines your technical or strategic advantage in the highly competitive market environment.

You May Also Like

Hot Definitions
  1. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  2. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  3. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  4. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  5. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center