Preface to the Revised Edition
Preface to the first edition
Acknowledgements

Chapter 1 | The Level of the Stock Market from a Historical Perspective
Chapter 2 | The Real Estate Market from a Historical Perspective

Part 1 Structural Factors
Chapter 3 | The Trigger: The Explosion of Capitalism, the Internet, and Other Events
Chapter 4 | Amplification Mechanisms: Spontaneous Ponzi Processes

Part 2 Cultural Factors
Chapter 5 | News Media
Chapter 6 | Economic Thinking in a New Era
Chapter 7 | A New Era and Bubbles Around the World

Part 3: Psychological Factors
Chapter 8 | Psychological Anchors in the Market
Chapter 9 | Herding and Contagion

Part 4: Attempts to rationalize overheating
Chapter 10: Efficient Markets, Random Walks, and Bubbles
Chapter 11 | What Investors Learned and Didn't Learn

Part 5: Calling for Action
Chapter 12 | Speculative Instability in a Free Society

References
Translator's Note

Crisis Economics Diagnosed by the Economic Guru of Our Time
Sharing wisdom on surviving a recession
The early 2000s, the dawn of a new millennium and the dawn of a new century, was a time of optimism and hope. Public expectations for the IT industry, fueled by the proliferation of PCs, the Internet, and communication devices, drove explosive growth in the stock market.
The Dow Jones Industrial Average, which was hovering around 3,600 in early 1994, tripled in just six years, surpassing 11,700 in early 2000.
During the same period, Brazil, France, China, Germany, and the UK also saw their stock markets increase by two to three times their real value, and several Asian countries, including Korea, also saw remarkable stock price increases during 1999, when the Dow Jones Industrial Average surpassed 10,000.

At a time when everyone was dreaming of prosperity due to the global stock market boom, Robert Shiller, a professor of economics at Yale University, published a book titled “Irrational Exuberance” warning of the formation and collapse of the IT bubble.
In an atmosphere at the time intoxicated by the myth of endless growth, this book, filled with provocative titles and content, seemed like it would quietly disappear, but in fact, starting the month after its publication, stock prices plummeted, signaling the end of the dot-com bubble, and it became a global bestseller.
The success of this book, rich in material and profound intellect, is not simply a stroke of luck, but a fitting tribute to Robert Schiller's scholarly integrity and exceptional ability.
As if to prove this, the detailed analysis and warnings about the housing bubble added to the revised edition in 2005 became a reality with the subprime mortgage crisis the following year.
By accurately predicting the collapse of the dot-com bubble and the subsequent collapse of the real estate bubble, Robert Shiller earned himself the reputation of being one of our time's greatest "crisis prophets" and a "born hero of economics."
This book (revised edition), written by a master of behavioral economics who combines traditional economics with social psychology, comprehensively analyzes the rise and fall of the stock and real estate markets from the perspectives of structural, cultural, and psychological factors. It also empirically examines and criticizes theories and arguments that deny market bubbles and justify overheating.
It also presents a reasonable solution to respond to market conditions that are constantly exposed to speculative instability.

The author emphasizes that before we hastily assume that the market is revealing some truth about a new era, that a true boom has arrived, we need to seriously consider what truly determines market fluctuations and how they impact the economy and our lives.
And the key takeaway is that much of the real determinants of market movements lie within our own minds.
The author, hailed as the economic guru of our time for his brilliant intellect, who foresaw two major economic crises, offers wisdom for all of us, both nationally and individually, struggling to emerge from the shadow of recession.
This is once again the reason why this book was presented to the world.

Structural factors that promote bubbles
Market expansion, pro-business legislation, monetary policy, mutual fund growth, increased trading volume…
Several structural factors contribute to market overheating.
First, we can mention the explosive expansion of the capitalist market.
The collapse of traditional communism and socialism, and the decline of labor unions and cooperative movements, have been replaced by vast international financial markets and online auction markets.
The parallel opening of the labor market in the process lowered the value of labor and increased the value of the stock and housing markets as investment destinations for securing stable assets.
Meanwhile, stock options, designed to guarantee the value of the labor of corporate executives and core workers, have created a pathological obsession with stock prices.

Next, we can cite the emergence of conservative parties and pro-business legislation based on respect for material values.
The election of Ronald Reagan as president in 1980 and the Republican takeover of the Senate in 1994, led to a sustained decline in capital gains taxes, which strengthened public confidence in the stock market.

Monetary policy that supports stock prices can also be considered an external condition.
The Fed's decision to cut interest rates to 1 percent in 2003 was a response to the stock market's decline, and this aggressive rate cut, which pushed real interest rates into negative territory, is believed to have had a significant impact on the housing market boom that followed in 2001.
Other factors include the Internet boom and the growth of online trading, the growth of mutual funds, and increased trading volume due to day traders and 24-hour trading. These external factors contribute to price increases gradually over time, making their relationship with market fluctuations unclear. However, they certainly have a significant impact on market movements.

Cultural factors that promote bubbles
News Media and the 'New Age' Theory
News media serve as key conduits of speculative market fluctuations through their efforts to capture readers' interest.
They try to further stimulate interest by making news about price changes that the public has already observed, thus focusing people's attention by making price movements more prominent.
Alternatively, it may remind people of past events or trading strategies that others may have adopted.
In this way, the media sometimes reinforces feedback from past price changes into further price changes, thereby facilitating the occurrence of other cascading events.

The economic thinking of a 'new era' also seems to be related to the overheating of the market.
Empirically, the term "new era" is used only after the market has risen significantly and people have begun to freak out.
Whenever the market reaches a new high, public speakers, authors, and other prominent figures come forward to explain the apparent optimism in the market, which is widely broadcast through the news media.
The idea of ​​a new era they are spreading is just part of the process of maintaining and amplifying the boom.
In other words, the new era theory can be said to be a modifier that appears mainly as an ex post facto interpretation of the market boom.

Psychological factors that promote bubbles
Psychological anchors, herding behavior
The true value of a market is difficult to define theoretically, and calculating it from the public's perspective is even more difficult.
Therefore, when the public makes judgments about the value of a market, they look for a reference point, which is called a 'psychological anchor'.
In the stock market, the anchor is the price of the previous day and the price trend in the past.
Therefore, stock market price movements usually follow the previous day's movements.
Also, people use different anchors depending on their interests.
This clearly shows the irrational and unreasonable side of humans.

The act of flocking is a representative example of this irrationality and unreason.
A restaurant that a famous celebrity visited becomes packed with customers, and an individual uncritically follows the opinions of the majority are examples of herding behavior.
In 2000, when this book was first published, many Americans fell into the collective delusion that stocks would continue to rise once purchased, which could be seen as a form of herding.
This kind of situation unfolded again in an irrational and unreasonable way during the 2007 US subprime crisis.

Attempts to rationalize overheating
Efficient Market Theory and Misconceptions
There are attempts by scholars and popular authors to justify market bubbles.
A representative example is the efficient market theory.
This theory asserts that the prices of all financial instruments always accurately reflect publicly available information.
Sometimes prices may seem too high or too low, but this is an illusion.
The reason stock prices appear unpredictable is explained as being because new information reflected in stock price fluctuations is unpredictable.
However, efficient market theory cannot properly explain long-term price deviations, such as the IT bubble of the late 20th century.

Just as there are theories that do not fit the market situation, there are also incorrect common sense beliefs among the public that do not fit the market situation.
For example, it is a misconception that if a stock price falls, it will soon rise again.
Stock prices can fall and remain at low levels for years.
Also, stock prices can be overvalued or undervalued for a long time.
It is also a misconception that stocks provide higher returns than bonds in the long run.
If you look at the long term, over several decades, stocks haven't always outperformed bonds.
There is no clear reason why things could get better in the future.
In our case, the myth of real estate's invincibility is being revealed to be a false common sense in today's market conditions.

Responding to irrational overheating
Portfolios, savings, monetary policy, the role of opinion leaders, developmental trade…
The more irrational the market becomes, the more wise a response becomes necessary.
The first thing to do is to reduce your stock holdings and build a better portfolio.
Risk diversification is common sense for modern people.
Next, you need to make a plan and increase your savings.
Not only individuals, but also foundations and universities should reduce the proportion of their funds invested in the stock market.
Meanwhile, the government's monetary policy should be operated gently to suppress bubbles.
In the case of the leadership that leads public opinion, it is necessary to present opinions that will stabilize the market.
Additionally, institutions should adopt measures to expand markets so that as many people as possible can trade frequently to ensure long-term economic stability.
As the trading population increases, the complementary aspects can be strengthened.
And individuals should be able to hedge their risks with the help of professionals.
In addition, socially, a more robust pension system linked to inflation must be established to ensure a stable life after retirement.

Professor Shiller warns that the U.S. housing market is entering the early stages of a bubble and that the stock market could overheat as the economic recovery is slow.
Therefore, it can be said that the implications of this book are still very significant even today.
We must keep a close eye on the developments in these markets to avoid another huge economic cost: the economic instability caused by another bubble and its collapse.