Irrational Exuberance

I recently read "Irrational Exuberance" by Robert  J. Shiller.  This was the 2005 second edition which added some material about housing prices to the 2000 first edition which was about the stock market.  Schiller's thesis in both cases was that prices were high by historical standards making expected future investment returns poor.  Unfortunately although Schiller proved to be correct I didn't find this book very interesting. 

One problem is that the book is dated.  Arguments about whether we are in a stock market or housing bubble are less interesting ten or fifteen years later when we know the answer.  There wasn't a lot in this book that was new to me.  Another problem is that Shiller sometimes makes his arguments in a somewhat simpleminded way.  For example he cites (p. 47-49) the rise of 401(k) plans as a factor increasing demand for stocks.  But of course traditional defined benefit pension plans also invested in stocks.  So it is not clear that shifting to defined contribution plans makes much difference. As another example Shiller claims (p. 177) that "... the efficient markets theory asserts that all financial prices accurately reflect all public information at all times."  But this is the most simplistic form of the theory, a more sophisticated version allows for some imperfections that can only grow to the point where they can be profitably exploited by the smartest best capitalized investors.  This deals with Shiller's later objection (p. 179) that without some profitable trades the smart money would not stick around to keep prices in line.

Shiller spends considerable time dealing with the objection that we can't be in a bubble because bubbles are impossible.  Apparently this isn't really a strawman as it seems there are reputable economists who believe something like this.  Still I find it hard to take this objection seriously and am not that interested in lengthy refutations.  In general I thought the book was too long, that the main ideas could have been presented more concisely.  I also found some of the advice unconvincing.  Schiller is big on hedging as a form of insurance.  But insurance generally costs money and may not be worth it.

In summary although Shiller is correct in his major claim that asset prices can get out of line I didn't find this book very compelling and so can't recommend it.