Irrational Exuberance Quotes

How do we know when irrational exuberance has unduly escalated asset values?

Irrational exuberance

It is an unfortunate fact that great and foolish excess can come into prices of common stocks in the aggregate. They are valued partly like bonds, based on roughly rational projections of use value in producing future cash. But they are also valued partly like Rembrandt paintings, purchased mostly because their prices have gone up, so far.

Fundamentals might be good for the first third or first 50 or 60 percent of a move, but the last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic... There is no training, classroom or otherwise, that can prepare for trading the last third of a move, whether it's the end of a bull market or the end of a bear market.

'Crowd folly', the tendency of humans, under some circumstances, to resemble lemmings, explains much foolish thinking of brilliant men and much foolish behavior - like investment management practices of many foundations represented here today. It is sad that today each institutional investor apparently fears most of all that its investment practices will be different from practices of the rest of the crowd.

The possibility that stock value in aggregate can become irrationally high is contrary to the hard-form "efficient market" theory that many of you once learned as gospel from your mistaken professors of yore. Your mistaken professors were too much influenced by "rational man" models of human behavior from economics and too little by "foolish man" models from psychology and real-world experience.

We see that hyperactivity and reward areas are important when the bubble's rising. People getting caught up in it. We also see areas involving mentalizing, which means thinking about other people: Who's buying? Who's selling? Do they know something? We see emotional areas before the crash that indicate a sense of uncertainty or dread.

Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.

Financial markets have a tendency to go to excess.

The generally accepted view is that markets are always right -- that is, market prices tend to discount future developments accurately even when it is unclear what those developments are. I start with the opposite view. I believe the market prices are always wrong in the sense that they present a biased view of the future.

History demonstrates that participants in financial markets are susceptible to waves of optimism. Excessive optimism shows the seeds of its own reversal in the form of imbalances that tend to grow over time.

The stock market is overpriced. Everything is overpriced. Junk is king.

Volatility is a symptom that people have no idea of the underlying value-that they have stopped playing the asset game. They're not buying because it's a company with certain attributes. They're buying because the price is rising. People are playing games not related to any concept at all of what the long-term value of the enterprise is. And they know it.

… they made the cardinal error of extrapolation. Forecasters assumed that recent trends would continue indefinitely and that hot economies would stay hot…. Euphoria overcame sound judgment, a process that has doomed economic forecasting for as long as experts have been doing it.

Most investors give too much credence to the theory that prices are rational; they presume that a market collapse must have been justified by serious economic trouble.

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?

You cannot have an asset that goes up in price 1% every month or 1% every six months or every day without people starting to start thinking it'll do the same tomorrow, so that's why these bubbles form.

For some reason, people take their cues from price action rather than from values. What doesn't work is when you start doing things that you don't understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it's going up.

What we need to understand is, one, that there are market failures; and two, that there are things like asset bubbles and irrational exuberance. There are periods of booms, bubbles, and manias. These things, if left to themselves, can lead to crashes, to busts, to panics.

We are in a big, fat, ugly bubble. And we better be awfully careful.

The Internet bubble circa 2000 is the most extreme in modern capitalism. In the 1930s, we had the worst depression in 600 years. Today is almost as extreme in the opposite way.

Yellen’s comments suggest, and I agree, that we are in an asset bubble.

Bubbles and crashes are textbook examples of collective decision making gone wrong. In a bubble, all of the conditions that make groups intelligent - independence, diversity, private judgement-disappear.

No one's fearful, everyone's greedy, and it will eventually end.