4Q 2017 Market Commentary

The term “irrational exuberance” was first coined in a speech on December 5, 1996 by then-chairman of the Federal Reserve Board, Alan Greenspan. In the speech, Greenspan essentially asked the question, how do we know when asset prices have “unduly risen” because of irrational, rather than rational, behavior?

Just a few years later, Robert Shiller, the Yale Professor who would eventually go on to win the Nobel Prize in Economics, used the term as the title for his best-selling book, Irrational Exuberance. The book, published in 2000 at the height of the dot-com bubble, argued against the lofty equity valuations of the time. It was almost immediately proven accurate.

In the years since, the term “irrational exuberance” has become ubiquitous among investors. In truth, the phrase is used too much. Akin to the fable of the boy who cried wolf, investors tend to cry “irrational exuberance” whenever asset valuations rise higher and faster than expected. As such, the phrase has lost some of its usefulness as a warning cry.

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