Irrational Exuberance: Revised and Expanded Third Edition

The stock market is difficult to understand. People try to create explanations as to why they can beat the market, but are almost always wrong. There are many bad tendencies. People will chase past trends, hoping not to miss out. People can also be nudged by small things - even if they do not realize it is happening. In Irrational Exuberance, Shiller uses numbers and anecdotes to explain why the markets are not very explainable. Stocks will often be more closely related to others in the same country than to others in the same industry.

There is a tendency to focus heavily on nominal returns. However, if inflation is higher than the return, the purchasing power of the investment will decrease over time. People often think of houses being a great investment because they are held for so long and have a great nominal gain. The real after-inflation gain is not so rosy. There is a lot of space available to build new housing, but not necessarily where it is most desired.

Stock markets respond to news, but not in a predictable manner. The 1929 stock market crash seemed to occur in a team when no significant new news was reported. There may have been many small items that finally cascaded to put things over the edge. There could also have been feedback loops that made things worse. It is difficult to understand the details of what went on. (But many people tried!)