At any given time, the term, irrational exuberance, may apply to the total or subsets of the securities market.

Article:

Key Characteristics

• Emotional Investing: Decisions driven by excitement or fear of missing out (FOMO), rather than analysis.

• Overvaluation: Prices rise because people expect them to keep growing, not because of underlying earnings or cash flow.

• Bubble Formation: This often precedes market bubbles and crashes, as seen in the dot-com boom and the housing bubble.

Here’s a simple example:

Example of Irrational Exuberance

Imagine a small tech startup launching a new app.

• Rational scenario: The company earns $1 million in revenue, and based on fundamentals, its stock should be worth around $10 per share.
• Irrational exuberance scenario: Investors get overly excited about the “next big thing” and start buying aggressively.  The stock price skyrockets to $100 per share—even though the company’s profits haven’t changed.

Why?  cause people believe the price will keep going up, not because the company’s actual value justifies it.  This creates a bubble, which eventually bursts when reality sets in.

The phrase “irrational exuberance” was first used publicly by Alan Greenspan, then Chairman of the U.S. Federal Reserve, in a speech on 5 December 1996, at the American Enterprise Institute.  The speech, titled “The Challenge of Central Banking in a Democratic Society,” was interpreted as a warning that the stock market might be overvalued during the dot-com boom. Greenspan later revealed that the phrase came to him while writing the speech in his bathtub.

Interestingly, Yale economist Robert J. Shiller—who later wrote the book Irrational Exuberance (2000)—was reportedly an influence on the phrase. Shiller suggested the word “irrational” in a conversation with Greenspan, but Greenspan coined the complete phrase himself.

Alan Greenspan’s “irrational exuberance” remark on 5 December 1996996, had an immediate and global market Impact:

• Instant Reaction in Asia: The Tokyo Stock Exchange was open during the speech and dropped about 3% immediately after the
• Global Ripple Effect: Other major markets followed suit—Hong Kong’s Hang Seng fell 2.9%, and Germany’s DAX also
• U.S. Market Response: U.S. markets dipped briefly when trading opened, but the effect was short-lived.  The Dow Jones and NASDAQ quickly recovered and continued climbing for several years, fueling the late-1990s tech bubble.

Ironically, while the phrase was intended as a cautionary signal, it did not stop the speculative surge.  In fact, the NASDAQ tripled in value after the speech before the dot-com crash in 2000.rstreet

Would you like me to create a timeline that shows the speech, the immediate market reaction, and the subsequent dot-com boom and bust?  Should I summarize why Greenspan’s warning failed to curb speculation?

Here’s the timeline summarizing the key events around Greenspan’s “irrational exuberance” remark and its aftermath:

Key Points: 5 December 199696 – Greenspan’s speech warns of possible market overvaluation.

· 6 December 1996 – Immediate global reaction: Tokyo down ~3%, Hang Seng -2.9%, DAX falls.

·       1997–1999 – Markets surge despite the warning, fueling the tech boom.

· 10 March 2000 – NASDAQ peaks at its all-time high.

·       2000–2002 – Dot-com crash wipes out trillions in market value.

Would you like me to add historical NASDAQ index values to this timeline for more context, or write a short analysis on why Greenspan’s warning failed to curb speculation for several interconnected reasons:

1.  Ambiguity of the Message

• The phrase “irrational exuberance” was vague and academic.  It didn’t specify which assets were overvalued or what corrective measures might follow.
• Investors interpreted it as an intellectual observation rather than a policy signal.

2   Strong Economic Fundamentals at the Time

• The late 1990s featured robust GDP growth, low inflation, and rising productivity (especially from tech innovation).
• These fundamentals gave investors confidence that high valuations were justified.

  . Global Liquidity and Easy Credit

• Interest rates were relatively low, and capital was abundant.
• Cheap financing fueled speculative investments in tech and internet startups.

4. Behavioral Biases and Herd Mentality

• Investors were caught in a “new economy” narrative, believing the internet would permanently change valuation metrics.
• Fear of missing out (FOMO) amplified risk-taking, overpowering cautionary signals.

5. Lack of Immediate Policy Action

• The Fed did not follow the speech with aggressive rate hikes or regulatory measures.
• Without concrete action, markets assumed Greenspan was not serious about tightening.

6. Media and Market Psychology

• The phrase became a catchy headline but was quickly overshadowed by bullish analyst reports and IPO hype.
• Instead of dampening enthusiasm, it became part of the cultural lore of the boom.

✅ Bottom Line: The warning failed because words alone rarely stop bubbles—especially when fundamentals, liquidity, and psychology all favor risk-taking.