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Jeremy Suggs
Jeremy Suggs

Irrational Exuberance Epub


This book is the first (and only) book to solve the mystery of the most famous bubble in world history: Tulipmania in 17th century Netherlands. It Is a legendary event but explanations have been lacking. People blame irrational exuberance, free markets, and an unleashed aristocracy.




Irrational Exuberance Epub



How a Stock Exchange Scare Dislocated the Life of the Empire For Two Days, a story in the "Doom of London" series in which the author sounds the clarion call of potential disasters that my befall the great city. Here, it is the tale of an investment "bubble", an irrational exuberance for buying shares of South African gold mining stocks. Excerpts:"From the highest to the lowest everybody was investing their savings in South Africa. ... In other words, there was a tremendous 'boom.' Nothing like it had ever been seen in the history of commerce. It was the golden hour of the promoter. Yet, for the most part, the schemes promised well. There was, however, an enormous amount of rubbish on the market. Some of the more thoughtful financiers scented danger ahead, but they were not listened to."All England was in the grip of the mania. Bona fide speculation and business had become gambling pure and simple. London thought of nothing else. The City was crammed with excited buyers and operators...."Then a cable telegram arrives from South Africa at one London newspaper office, saying that a tremendous earthquake has destroyed the Johannesburg water system and flooded the gold mines. The undersea cables from South Africa then broke down after the message was received, so no further messages could be sent or received to confirm or to learn more. The newspaper publishes the exclusive news. Investors panic and sell their shares at any price before they are ruined by plunging values. But is it true, or a fraud? -- a market manipulation?


Maybe the word bubble is used too carelessly. Eugene Fama certainly thinks so. Fama, the most important proponent of the efficient markets hypothesis, denies that speculative bubbles exist. In his 2014 Nobel lecture, Fama states that the word bubble refers to an irrational strong price increase that implies a predictable strong decline. If that is what bubble means, and if predictable means that we can specify the date when a bubble bursts, then I agree with him that there may be little solid evidence that bubbles exist. But that is not my definition of a bubble, for speculative markets are just not so predictable.


The current edition of this book is partly motivated by work I did with George Akerlof for our 2009 book Animal Spirits, a book whose title correctly suggests some overlap of topics with Irrational Exuberance. The ancient term animal spirits (in Latin, spiritus animalis) refers to the fluctuations in the basic driving force in human actions; it is a term that was resurrected by the economist John Maynard Keynes, who gives a view of the economy as involving fundamental psychological instabilities. Both fluctuations in irrational exuberance and animal spirits are still very much a part of our lives. We must still summon our whole arsenal of social sciences to try to understand them.


I have created a website, irrationalexuberance.com, which will present new information related to the topics in this book and will provide regular updates for some of the data and charts shown in this book.


I have revised the book in this second edition to try to extend its argument that variations caused by changing attitudes, irrational beliefs, and foci of attention are an important factor in our changing economic lives, and to examine the consequences for our economy and our future. I have recast the examples of these variations in terms of more recent events. Notably, I have added a chapter about the enormous home price boom that many countries have been experiencing since the late 1990s, and I have broadened the discussion throughout the book to consider speculation in real estate. Beyond that, this edition extends and improves the basic arguments in a number of directions. I have been thinking about the issues in this book for five more years since the first edition, and the research on behavioral economics, which I closely follow, has made substantial progress over that interval as well.


At present there is a whiff of extravagant expectation, if not irrational exuberance, in the air. People are optimistic about the stock market. There is a lack of sobriety about its downside and the consequences that would ensue as a result. If the Dow were to drop to 6,000, the loss would represent something like the equivalent value of the entire housing stock of the United States. There would be harmful and uneven effects on individuals, pension funds, college endowments, and charitable organizations.


CHAPTER ONETHE LIGHT-BEAM RIDER"I promise you four papers," the young patent examiner wrote his friend.The letter would turn out to bear some of the most significant tidingsin the history of science, but its momentous nature was masked by animpish tone that was typical of its author. He had, after all, justaddressed his friend as "you frozen whale" and apologized for writing aletter that was "inconsequential babble." Only when he got around todescribing the papers, which he had produced during his spare time, didhe give some indication that he sensed their significance."The first deals with radiation and the energy properties of light andis very revolutionary," he explained. Yes, it was indeed revolutionary.It argued that light could be regarded not just as a wave but also as astream of tiny particles called quanta. The implications that wouldeventually arise from this theory -- a cosmos without strict causalityor certainty -- would spook him for the rest of his life."The second paper is a determination of the true sizes of atoms." Eventhough the very existence of atoms was still in dispute, this was themost straightforward of the papers, which is why he chose it as thesafest bet forhis latest attempt at a doctoral thesis. He was in theprocess of revolutionizing physics, but he had been repeatedly thwartedin his efforts to win an academic job or even get a doctoral degree,which he hoped might get him promoted from a third- to a second-classexaminer at the patent office.The third paper explained the jittery motion of microscopic particles inliquid by using a statistical analysis of random collisions. In theprocess, it established that atoms and molecules actually exist."The fourth paper is only a rough draft at this point, and is anelectrodynamics of moving bodies which employs a modification of thetheory of space and time." Well, that was certainly more thaninconsequential babble. Based purely on thought experiments -- performedin his head rather than in a lab -- he had decided to discard Newton'sconcepts of absolute space and time. It would become known as theSpecial Theory of Relativity.What he did not tell his friend, because it had not yet occurred to him,was that he would produce a fifth paper that year, a short addendum tothe fourth, which posited a relationship between energy and mass. Out ofit would arise the best-known equation in all of physics: E=mc2.Looking back at a century that will be remembered for its willingness tobreak classical bonds, and looking ahead to an era that seeks to nurturethe creativity needed for scientific innovation, one person stands outas a paramount icon of our age: the kindly refugee from oppression whosewild halo of hair, twinkling eyes, engaging humanity, and extraordinarybrilliance made his face a symbol and his name a synonym for genius.Albert Einstein was a locksmith blessed with imagination and guided by afaith in the harmony of nature's handiwork. His fascinating story, atestament to the connection between creativity and freedom, reflects thetriumphs and tumults of the modern era.Now that his archives have been completely opened, it is possible toexplore how the private side of Einstein -- his nonconformistpersonality, his instincts as a rebel, his curiosity, his passions anddetachments -- intertwined with his political side and his scientificside. Knowing about the man helps us understand the wellsprings of hisscience, and vice versa. Character and imagination and creative geniuswere all related, as if part of some unified field.Despite his reputation for being aloof, he was in fact passionate inboth his personal and scientific pursuits. At college he fell madly inlove with the only woman in his physics class, a dark and intenseSerbian named Mileva Maric. They had an illegitimate daughter, thenmarried and had two sons. She served as a sounding board for hisscientific ideas and helped to check the math in his papers, buteventually their relationship disintegrated. Einstein offered her adeal. He would win the Nobel Prize someday, he said; if she gave him adivorce, he would give her the prize money. She thought for a week andaccepted. Because his theories were so radical, it was seventeen yearsafter his miraculous outpouring from the patent office before he wasawarded the prize and she collected.Einstein's life and work reflected the disruption of societalcertainties and moral absolutes in the modernist atmosphere of the earlytwentieth century. Imaginative nonconformity was in the air: Picasso,Joyce, Freud, Stravinsky, Schoenberg, and others were breakingconventional bonds. Charging this atmosphere was a conception of theuniverse in which space and time and the properties of particles seemedbased on the vagaries of observations.Einstein, however, was not truly a relativist, even though that is howhe was interpreted by many, including some whose disdain was tinged byanti-Semitism. Beneath all of his theories, including relativity, was aquest for invariants, certainties, and absolutes. There was a harmoniousreality underlying the laws of the universe, Einstein felt, and the goalof science was to discover it.His quest began in 1895, when as a 16-year-old he imagined what it wouldbe like to ride alongside a light beam. A decade later came his miracleyear, described in the letter above, which laid the foundations for thetwo great advances of twentieth-century physics: relativity and quantumtheory.A decade after that, in 1915, he wrested from nature his crowning glory,one of the most beautiful theories in all of science, the general theoryof relativity. As with the special theory, his thinking had evolvedthrough thought experiments. Imagine being in an enclosed elevatoraccelerating up through space, he conjectured in one of them. Theeffects you'd feel would be indistinguishable from the experience ofgravity.Gravity, he figured, was a warping of space and time, and he came upwith the equations that describe how the dynamics of this curvatureresult from the interplay between matter, motion, and energy. It can bedescribed by using another thought experiment. Picture what it would belike to roll a bowling ball onto the two-dimensional surface of atrampoline. Then roll some billiard balls. They move toward the bowlingball not because it exerts some mysterious attraction but because of theway it curves the trampoline fabric. Now imagine this happening in thefour-dimensional fabric of space and time. Okay, it's not easy, butthat's why we're no Einstein and he was.The exact midpoint of his career came a decade after that, in 1925, andit was a turning point. The quantum revolution he had helped to launchwas being transformed into a new mechanics that was based onuncertainties and probabilities. He made his last great contributions toquantum mechanics that year but, simultaneously, began to resist it. Hewould spend the next three decades, ending with some equations scribbledwhile on his deathbed in 1955, stubbornly criticizing what he regardedas the incompleteness of quantum mechanics while attempting to subsumeit into a unified field theory.Both during his thirty years as a revolutionary and his subsequentthirty years as a resister, Einstein remained consistent in hiswillingness to be a serenely amused loner who was comfortable notconforming. Independent in his thinking, he was driven by an imaginationthat broke from the confines of conventional wisdom. He was that oddbreed, a reverential rebel, and he was guided by a faith, which he worelightly and with a twinkle in his eye, in a God who would not play diceby allowing things to happen by chance.Einstein's nonconformist streak was evident in his personality andpolitics as well. Although he subscribed to socialist ideals, he was toomuch of an individualist to be comfortable with excessive state controlor centralized authority. His impudent instincts, which served him sowell as a young scientist, made him allergic to nationalism, militarism,and anything that smacked of a herd mentality. And until Hitler causedhim to revise his geopolitical equations, he was an instinctive pacifistwho celebrated resistance to war.His tale encompasses the vast sweep of modern science, from theinfinitesimal to the infinite, from the emission of photons to theexpansion of the cosmos. A century after his great triumphs, we arestill living in Einstein's universe, one defined on the macro scale byhis theory of relativity and on the micro scale by a quantum mechanicsthat has proven durable even as it remains disconcerting.His fingerprints are all over today's technologies. Photoelectric cellsand lasers, nuclear power and fiber optics, space travel, and evensemiconductors all trace back to his theories. He signed the letter toFranklin Roosevelt warning that it may be possible to build an atombomb, and the letters of his famed equation relating energy to masshover in our minds when we picture the resulting mushroom cloud.Einstein's launch into fame, which occurred when measurements madeduring a 1919 eclipse confirmed his prediction of how much gravity bendslight, coincided with, and contributed to, the birth of a new celebrityage. He became a scientific supernova and humanist icon, one of the mostfamous faces on the planet. The public earnestly puzzled over histheories, elevated him into a cult of genius, and canonized him as asecular saint.If he did not have that electrified halo of hair and those piercingeyes, would he still have become science's preeminent poster boy?Suppose, as a thought experiment, that he had looked like a Max Planckor a Niels Bohr. Would he have remained in their reputational orbit,that of a mere scientific genius? Or would he still have made the leapinto the pantheon inhabited by Aristotle, Galileo, and Newton?The latter, I believe, is the case. His work had a very personalcharacter, a stamp that made it recognizably his, the way a Picasso isrecognizably a Picasso. He made imaginative leaps and discerned greatprinciples through thought experiments rather than by methodicalinductions based on experimental data. The theories that resulted wereat times astonishing, mysterious, and counterintuitive, yet theycontained notions that could capture the popular imagination: therelativity of space and time, E=mc2, the bending of light beams, and thewarping of space.Adding to his aura was his simple humanity. His inner security wastempered by the humility that comes from being awed by nature. He couldbe detached and aloof from those close to him, but toward mankind ingeneral he exuded a true kindness and gentle compassion.Yet for all of his popular appeal and surface accessibility, Einsteinalso came to symbolize the perception that modern physics was somethingthat ordinary laymen could not comprehend, "the province of priest-likeexperts," in the words of Harvard professor Dudley Herschbach. It wasnot always thus. Galileo and Newton were both great geniuses, but theirmechanical cause-and-effect explanation of the world was something thatmost thoughtful folks could grasp. In the eighteenth century of BenjaminFranklin and the nineteenth century of Thomas Edison, an educated personcould feel some familiarity with science and even dabble in it as anamateur.A popular feel for scientific endeavors should, if possible, be restoredgiven the needs of the twenty-first century. This does not mean thatevery literature major should take a watered-down physics course or thata corporate lawyer should stay abreast of quantum mechanics. Rather, itmeans that an appreciation for the methods of science is a useful assetfor a responsible citizenry. What science teaches us, verysignificantly, is the correlation between factual evidence and generaltheories, something well illustrated in Einstein's life.In addition, an appreciation for the glories of science is a joyfultrait for a good society. It helps us remain in touch with thatchildlike ca-pacity for wonder, about such ordinary things as fallingapples and elevators, that characterizes Einstein and other greattheoretical physicists.That is why studying Einstein can be worthwhile. Science is inspiringand noble, and its pursuit an enchanting mission, as the sagas of itsheroes remind us. Near the end of his life, Einstein was asked by theNew York State Education Department what schools should emphasize. "Inteaching history," he replied, "there should be extensive discussion ofpersonalities who benefited mankind through independence of characterand judgment." Einstein fits into that category.At a time when there is a new emphasis, in the face of globalcompetition, on science and math education, we should also note theother part of Einstein's answer. "Critical comments by students shouldbe taken in a friendly spirit," he said. "Accumulation of materialshould not stifle the student's independence." A society's competitiveadvantage will come not from how well its schools teach themultiplication and periodic tables, but from how well they stimulateimagination and creativity.Therein lies the key, I think, to Einstein's brilliance and the lessonsof his life. As a young student he never did well with rote learning.And later, as a theorist, his success came not from the brute strengthof his mental processing power but from his imagination and creativity.He could construct complex equations, but more important, he knew thatmath is the language nature uses to describe her wonders. So he couldvisualize how equations were reflected in realities -- how theelectromagnetic field equations discovered by James Clerk Maxwell, forexample, would manifest themselves to a boy riding alongside a lightbeam. As he once declared, "Imagination is more important thanknowledge."That approach required him to embrace nonconformity. "Long liveimpudence!" he exulted to the lover who would later become his wife. "Itis my guardian angel in this world." Many years later, when othersthought that his reluctance to embrace quantum mechanics showed that hehad lost his edge, he lamented, "To punish me for my contempt forauthority, fate made me an authority myself."His success came from questioning conventional wisdom, challengingauthority, and marveling at mysteries that struck others as mundane.This led him to embrace a morality and politics based on respect forfree minds, free spirits, and free individuals. Tyranny repulsed him,and he saw tolerance not simply as a sweet virtue but as a necessarycondition for a creative society. "It is important to fosterindividuality," he said, "for only the individual can produce the newideas."This outlook made Einstein a rebel with a reverence for the harmony ofnature, one who had just the right blend of imagination and wisdom totransform our understanding of the universe. These traits are just asvital for this new century of globalization, in which our success willdepend on our creativity, as they were for the beginning of thetwentieth century, when Einstein helped usher in the modern age.Copyright 2007 by Walter Isaacson CHAPTER TWO CHILDHOOD 1879-1896 The SwabianHe was slow in learning how to talk


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