Alan Greenspan’s 1996 reference to “irrational exuberance” in the dot.com industry had an immediate effect on global investment. The term is now associated with overvalued markets and speculation without rational evaluation, and is also the title of a book by Robert J. Shiller.
Irrational exuberance is a term that many financiers will instantly recognize. These two words used in reference to the dot.com industry by Alan Greenspan during a 1996 dinner speech had an immediate worldwide effect on investment in that industry. Since then, the term has been associated with the need to carefully observe descriptive language, especially when speaking from a position of authority. On its own, people now use irrational exuberance as a description of investors who overvalue markets, contrary to rational sense, and do so at the risk of losing investments.
In 1996, Alan Greenspan was Chairman of the Washington Federal Reserve Board, a position he held from 1987 to 2006, and his tenure concerned the tendency of investors to overvalue specific markets, especially the dot.com industry. He and others did not realize that such a description, which was buried in the middle of a speech, could have a profound effect. Of course, the speech was broadcast, making it available to people all over the world. This effect was not only due to Greenspan’s description, but to the fact that there was precision in it, and the dot.com bubble burst that occurred a few years later is often considered predicted by Greenspan’s observations.
The immediate effect was very noticeable. The day after Greenspan described investment in this industry as irrational exuberance, stock markets fell by several percentage points around the world. In London, Tokyo, Hong Kong, Frankfurt and the US, there was a decline of up to four percent in investment. Although the markets recovered in a few days, all economists learned how easy it was to influence the market with just a few words. However, Greenspan justified himself in depicting it, as evidenced by the subsequent near-complete collapse of spending in dot.com industries.
In addition to the term known as an abject lesson as a result of speaking to the state of the markets, it is now also known as descriptive of any investment in a market that is not justifiable. Another example of irrational exuberance occurred with investments in the housing market and the financial industries that accompany them. Investments peaked above what was rationally justified, causing profound effects when the market crashed. Many times, when investors speculate without justification, they can create bubbles of more investment that eventually burst, with serious consequences.
Irrational Exuberance is also the name of a 2005 book by Robert J. Shiller, a professor of economics at Yale University. The phrase is still known as keywords that evoke a cautionary tale about the effects of expert opinion on investing. Furthermore, it remains a description of speculation without rational evaluation.
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