Sta Hungry Stay Foolish

Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

Irrational exuberance

In 1996, former Fed Chairman Alan Greenspan coined the term “irrational exuberance“. He warned for overvalued asset prices, following long periods of low inflation and lower risk premiums. Today, the stock markets are widely seen as overvalued. Each bit of bad news (eg, Covid-19, economy, unemployment) translates in higher values on stock exchanges.

Even recent events in the US Capitol could be described by “irrational exuberance”. How else can you explain a group of excited men and women believing that a presidential election was stolen? To date, all courts rejected that claim for a simple reason: the plaintiff supplied no evidence for his claim. Also see my 2020 blog: Proof by assertion.

The corona debate is also subject to “irrational exuberance”. Both sides are using the wildest arguments for stressing their case. It seems (to me) that irrationality is still peaking. Why?

A 2017 Inc. article states that research by Daniel Kahneman and Richard Thaler, both Nobel prize winners in Economics, has shown that irrationality is the human default. Hence, the concept of homo economicus – as introduced by Adam Smith – does not exist.

Their observation should make the explanation – to my Why question above – more simple because there is no tipping point or turning point. There are just degrees of irrationality.

Irrational exuberance is related to emotions. There are two primal emotions: Love and Fear. Other emotions are derivatives. See my blog: Human Emotions (2) – a revisit

In general, Fear will create chaos that will ultimately result in a Vacuum. Love creates a balance (eg, relationship) that will ultimately result in an Equilibrium

Hence, irrational exuberance fits well in our current Vacuum. People fear the coronavirus, and have put their hopes on a vaccine. It’s still unclear which will win: the vaccine or (new strains of) the virus

Once we will leave the Vacuum then it’s likely that irrationality will reduce because Hope has won from Fear. However, a strong recovery could be bad for asset prices and (economic) bubbles may burst.

Hope Returns (2020) by Matthew West

artist, lyrics, video, Wiki

Note: all markings (bolditalicunderlining) by LO unless stated otherwise.


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