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.

  1. Icarus Factor

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

    A stock with a current price that is not justified by its earnings ...
  3. Herd Instinct

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

    The former chairman of the Board of Governors of the Federal ...
  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 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. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  9. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  10. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  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 >>
  3. How do mutual funds split?

    Mutual funds split in the same way that individual stocks split, but less often. Like a stock split, mutual fund splits do ... Read Full Answer >>
  4. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  5. How can I use a regression to see the correlation between prices and interest rates?

    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
  6. How do I calculate the rule of 72 using Matlab?

    In finance, the rule of 72 is a useful shortcut to assess how long it takes an investment to double given its annual growth ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center