Irrational Exuberance

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.

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.

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