"Investor beware!" might be an appropriate alternate title for the second edition of Irrational Exuberance by prize-winning Yale economist Robert Shiller. Most everyone will recall that the first edition was released right before the beginning of the dot-com stock market collapse in the spring of 2000. Certainly, one feels duly cautioned after reading the second edition. Now that policymakers are increasingly urging Americans to take responsibility for their own retirement savings, the onus of the author's warnings is all the more daunting.
Given the significant developments since the publication of the first edition of this now widely hailed and prescient book, Shiller offers a new, completely revised and amended text. He broadens his discussion beyond the specific focus of the Internet boom and the speculative investment climate it encouraged. The second edition goes even further, to examine the psychology of speculation in general, including as part of this a thorough evaluation of the speculative aspects of the current real estate market.
Critically analyzing investment assumptions such as "hold stocks for the long run" and "real estate prices will only go up," Shiller confronts many widely accepted theories. He's also concerned about the increasingly dominant concept that we are an ownership society in which everyone is expected to fend for themselves. While he acknowledges that there is "much to be said for the ownership society in terms of its ability to promote economic growth, by its very nature it also invites speculation, and filtered through the vagaries of human psychology, it creates a horde of risks that we must somehow try to manage."
So how much should the public sector be responsible for in terms of guaranteeing the financial well-being of its citizens? Shiller doesn't have a final singular proposal, but offers suggestions on ways to improve Social Security and to guarantee that those in the lower wage bracket in particular are protected. He suggests that public bodies need to play an active role in stabilizing opinions about the investment climate as well as policy in general regarding how the market is traded and monetary policy is implemented. He also presents a number of common-sense recommendations for citizens, such as: increase your savings, decrease your debt load, and diversify investment holdings.
This book is useful for the investor to have in hand both to quickly review historical trends and to ponder its thoughtful commentary on how to view investing and guaranteeing one's financial security given the current economic and social environment. Cautious and prudent saving and investing is key. In the end, however, can we be sure any investment is secure? Unfortunately, the conclusion arrived at in Shiller's terribly insightful and readable second edition is: maybe not.Ann Cullen