What is 'Irrational Exuberance'

Irrational exuberance refers to investor enthusiasm that drives asset prices up to levels that aren't supported by fundamentals. The term is believed to have been coined by Alan Greenspan in a 1996 speech, "The Challenge of Central Banking in a Democratic Society." The speech was given near the beginning of the 1990s dotcom bubble, a textbook example of 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.

BREAKING DOWN 'Irrational Exuberance'

Irrational exuberance is believed to be a problem because it gives rise to a bubble in asset prices. But when the bubble bursts, investors engage in panic selling, sometimes selling their assets for less than they're worth. The panic can also spread to other asset classes, and can even cause a recession.

Greenspan raised the question of whether central banks should address irrational exuberance via monetary policy. He believed that central should raise interest rates when it appears that a speculative bubble is beginning to take shape.

"Irrational Exuberance" is also the name of a 2000 book by economist Robert Shiller. The book 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. Housing Bubble

    A housing bubble is a run-up in home prices fueled by demand, ...
  2. Pulling In Their Horns

    Pulling in their horns refers to cautious activity by investors ...
  3. Bubble

    A bubble is an economic cycle characterized by rapid expansion ...
  4. Pale Recession

    A pale recession is a phrase used in May 2008 by Alan Greenspan ...
  5. Frame Dependence

    Frame dependence is the human tendency to view a scenario differently ...
  6. Panic Selling

    Panic selling refers to wide-scale selling of an investment, ...
Related Articles
  1. Insights

    4 Reasons Why Irrational Exuberance Lasts

    20 years ago, Alan Greenspan gave his famous "irrational exuberance" speech, but asset bubbles take a long time to pop.
  2. Insights

    'Irrational Exuberance' 20 Years On

    The S&P is up 196% since Greenspan uttered these now-famous words.
  3. 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.
  4. Insights

    Should the Fed Be More Worried About Asset Bubbles?

    While the Fed should be concerned that assets bubbles might impact economic stability, monetary policy is not the best tool to mitigate this threat.
  5. Investing

    Why the Stock Bubble Will Burst Quickly: Yale's Shiller

    Nobel Laureate Robert Shiller warns that stocks could tumble suddenly and unexpectedly.
  6. Tech

    Bitcoin Price Bubble Could Last 100 Years, Says Yale Economist

    Nobel Laureate Robert Shiller of Yale University doesn't know what to make of the top cryptocurrency.
  7. Tech

    Why Nobel Economist Robert Shiller Is Still A Bitcoin Skeptic

    Nobel laureate Robert Shiller has referred to bitcoin as an example of irrational exuberance. In a new piece, he again came out swinging against bitcoin
  8. Insights

    How Do Asset Bubbles Cause Recessions?

    Understand how asset bubbles often lead to deep, protracted recessions. Read about historical examples of recessions preceded by asset bubbles.
  9. Investing

    Copper Execs Warn About 'Irrational' Price Rally (COPX, FCX)

    The recent optimism in copper is seen as too premature and is being described as "irrational exuberance" by some of the world's larger copper producers.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  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. Can the Efficient Market Hypothesis explain economic bubbles?

    Learn about the nuanced relationship between the efficient market hypothesis and economic bubbles and the requirements and ... Read Answer >>
  5. What is the difference between book value and carrying value

    Dig deeper into the definitions of carrying value and book value, and learn to differentiate between their various financial ... Read Answer >>
  6. Is the banking sector a good choice for value investing?

    Find out why the banking sector is attractive to value investors, who typically look to buy discounted stocks during times ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center