Robert Shiller, the author of "Irrational Exuberance", is the winner of the 2013 Nobel Prize in Economics, a professor in the Department of Economics at Yale University, and one of the founders of behavioral finance. This book is a classic in the field of behavioral finance, which studies stock market fluctuations. Why do stock markets surge and plummet? Is it a chance factor? No, this is the inevitable result of irrational factors in the market.

Why would the stock market experience such sudden rises and falls repeatedly? In this regard, Professor Schiller puts forward his views in this book. He believes that the reason why stock market crashes occur repeatedly is because the market is always prone to false prosperity. Under people's pursuit and speculation, stock prices are getting higher and higher, and they deviate further and further from their true value. Shiller called this situation irrational exuberance. This state of irrational exuberance cannot last forever. Sooner or later, the bubble will burst, and then the stock price will plummet and accelerate, and a stock market crash will erupt. Take the 1929 stock market crash as an example. Before the crash, there was a six-year bull market, with the stock index soaring 3.7 times. You see, this is a typical manifestation of irrational exuberance. The eventual outbreak of the stock market crash was the inevitable result of the accumulation of irrational exuberant bubbles.

This book talks about the irrational factors of the market from two aspects.

First, what are the structural factors that cause the market to fall into irrational exuberance?

This book summarizes the factors causing the irrational rise of the stock market into four aspects, namely: new era culture, media culture, changes in investment and financial management methods, and social psychological influence.

These factors will cause investors to have excessive confidence in the stock market and have unrealistic expectations for the future growth of the stock market, which will push up the stock price. However, Shiller believes that from these factors to the irrational exuberance of the entire stock market, there is also a market amplification effect. In other words, the market, like a magnifying glass, magnifies the role of these factors.

What does this process look like? This is what the book says: The first batch of investors, due to various factors, including the belief that the times were special, or changes in financial management methods, entered the stock market to buy stocks, which brought about the first wave of rise in stock prices. This shows that their decision to buy stocks was correct. As a result, the second wave of investors also enters the stock market to take over, and the stock price will rise for the second time. Coupled with optimistic reports from the media and optimistic predictions from analysts, waves of investors entered the market, and stock prices rose again and again, slowly forming irrational exuberance.

Second, what kind of psychological factors are at work behind the structural factors of the market.

Shiller believes that this amplification effect is very similar to the familiar Ponzi scheme. In the classic Ponzi scheme, the scammer makes up a story to persuade waves of investors to invest quickly and there will be high returns. But in fact, the scammers pay new investors' money in return to old investors. When the old investors saw that they had received the promised returns, they found out that they were indeed lying, so they spread the word to attract more new investors to join. The amplification effect of the stock market is the same. The rise in stock prices confirms the story and attracts batches of new investors to enter the market to take over the market. However, there is no single liar in the stock market who carefully planned the scam. It was everyone who completed this Ponzi scheme together, and everyone in the market had a share. Shiller called this situation the structural factor of irrational exuberance.

Schiller believes that behind the structural factors are human psychological factors. Human beings have an innate nature, that is, their way of thinking is highly dependent on intuitive thinking, which causes your judgment and decision-making to be affected by many biases. The existence of these biases has had a significant impact on the irrational exuberance of the market.

Specifically regarding the issue of irrational exuberance, Shiller believes that investors in the stock market are not rational, and their decisions and judgments are often affected by intuitive thinking. Intuitive thinking will bring a lot of biases, and biases will lead to blind pursuit of gains and losses, leading to irrational prosperity. Among these biases, four are more important: the first is anchoring effect, the second is bandwagon effect, the third is availability preference, and the fourth is causality preference.

After conducting an in-depth analysis of irrational exuberance, Professor Shiller also gave a series of suggestions for easing bubbles and preventing stock market crashes. For example, encourage opinion leaders in the market, especially influential figures like the Chairman of the Federal Reserve, to make moderate and pragmatic remarks that are conducive to stabilizing the market, and promptly remind investors to pay attention to risks during the market rise stage to hedge against the new era. The negative impact of culture and media cultural factors. Another example is to guide the media to eliminate the impact of inflation when reporting stock returns, solve the problem of water injection in stock returns, and reduce people's unrealistic enthusiasm. In addition, policies to encourage trading can also be adopted to provide short trading opportunities for investors who are bearish on stock prices, balance the bubble of rising stock prices, and provide more risk hedging tools for inexperienced ordinary investors. Did you find that the above suggestions are not directly asking you to do something or not to do something, but to guide you to make better decisions, which can be said to be in the same vein as the nudge method in behavioral economics. You can understand it as a boosting method in the field of behavioral finance.