Irrational exuberance is a phrase used by the then-Federal Reserve Board chairman, Alan
Greenspan, in a speech given at the American Enterprise Institute during the dot-com bubble
of the 1990s.
The phrase was interpreted as a warning that the market might be overvalued.
Initial fame: Greenspan's comment was made during a televised
speech on December 5, 1996 (emphasis added in excerpt):
Clearly, sustained low inflation implies less uncertainty about the future, and lower risk
premiums imply higher prices of stocks and other earning assets.
We can see that in the inverse relationship exhibited by price/earnings ratios and the
rate of inflation in the past.
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?
— "The Challenge of Central Banking in a Democratic Society", 1996-12-05
The Tokyo market was open during the speech and immediately moved down sharply after this
comment, closing off 3%.
Markets around the world followed.
The prescience of the short comment within a rather dry and complex speech would not
normally have been so memorable; however, it was followed about three years later by
major slumps in stock markets worldwide, particularly the Nasdaq Composite, provoking a strong reaction
in financial circles and making its way into colloquial speech.
Greenspan's comment was well remembered, although few heeded the warning.
Origin of the phrase: The phrase was also used by Yale professor
Robert Shiller, who was reportedly Greenspan's source for the phrase.
Shiller used it as the title of his book, Irrational Exuberance, in 2000.
Shiller is associated with the CAPE ratio and the Case-Shiller Home Price Index popularized
during the housing bubble of 2004–2007.
He is frequently asked during interviews whether markets are irrationally exuberant as asset
prices rise.
There was some speculation for many years whether Greenspan borrowed the phrase from
Shiller without attribution, although Shiller later wrote that he contributed "irrational"
at a lunch with Greenspan before the speech but "exuberant" was a previous Greenspan term
and it was Greenspan who coined the phrase and not a speech writer.
Greenspan wrote in his 2008 book that the phrase occurred to him in the bathtub while
he was writing a speech.
The irony of the phrase and its aftermath lies in Greenspan's widely held reputation
as the most artful practitioner of Fedspeak, often known as Greenspeak, in the modern televised
era.
The speech coincided with the rise of dedicated financial TV channels around the world that
would broadcast his comments live, such as CNBC. Greenspan's idea was to obfuscate the
Fed Chairman's true opinion in long complex sentences with obscure words so as to intentionally
mute any strong market response.
Precisely because he was considered to be so good at this, an uncharacteristically clear
statement such as "irrational exuberance" was viewed as a strong signal to the markets
and its meaning was widely discussed by financial journalists at the time of the speech.
The further irony was that if it was indeed his intended purpose to "talk markets down"
he was later ignored as stock valuations three years later dwarfed the levels at the time
of the speech.
This phrase is arguably the most famous example of Greenspeak, albeit perhaps an atypical
one.
Continued popularization: It had become a catchphrase of the boom to
such an extent that, during the economic recession that followed the stock market collapse of
2000, bumper stickers reading "I want to be irrationally exuberant again" were sighted
in Silicon Valley and elsewhere.
By the mid-to-late 2000s the dot-com losses were recouped and eclipsed by a combination
of events, including the 2000s commodities boom and the United States housing bubble.
However, the recession of 2007 onward wiped out these gains.
The second market slump brought the phrase back into the public eye, where it was much
used in hindsight, to characterize the excesses of the bygone era.
In 2006, upon Greenspan's retirement from the Federal Reserve Board, The Daily Show
with Jon Stewart held a full-length farewell show in his honor, named An Irrationally Exuberant
Tribute to Alan Greenspan.
The term gained new currency after the collapse of the US housing market in 2008 that led
to a worldwide financial panic.
Shiller was the co-creator of the Case-Shiller index that tracks US residential housing prices.
He is frequently interviewed as an expert on home prices and shared the Nobel prize
in economics in 2013 for his work on asset prices.
Greenspan's 1996 speech and Shiller's 2000 book are often viewed as harbingers of future
frenzy whether or not they specifically predicted the bubbles and subsequent crashes that followed.
This combination of events caused the phrase at present to be most often associated with
the 1990s dot-com bubble and the 2000s US housing bubble although it can be linked to
any financial asset bubble or social frenzy phenomena, such as the tulip mania of 17th
century Holland.
The phrase is often cited in conjunction with criticism of Greenspan's policies and debate
whether he did enough to contain the two major bubbles of those two decades.
It is also used in arguments about whether capitalist free markets are rational.
Nobel Prize Laureate and author of seminal Irrational Exuberance (book), Robert J. Shiller,
called Bitcoin the best current example of a speculative bubble.
Author Dan Pink also used the phrase in 2009 in his book "Drive: The Surprising Truth About
What Motivates Us" in the chapter discussing how extrinsic motivation can encourage short-term
thinking at the cost of long-term health: "This is the nature of economic bubbles: What
seems to be irrational exuberance is ultimately a bad case of extrinsically motivated myopia"
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