In the mid-90s a man called Alan Greenspan was Chairman of the
US Federal Reserve. Thats the central bank over there.
Under his watch, American stocks were bubbling along nicely.
In 1990, the NASDAQ was valued at just over 600 points. By 2000
it had rocketed to 5,000 points.
Thats a 733% rise.
But it didnt last.
The market popped spectacularly at the summit. And over the next
three years, the NASDAQ would plunge to 1,000 points.
Unlike most, Greenspan had seen it coming. And he actually tried
to warn everyone.
He delivered his now infamous Challenge of Central Banking in a
Democratic Society speech in December 1996. It was during this talk
that he coined the term irrational exuberance.
But how do we know when irrational exuberance has unduly
escalated asset values, which then become subject to unexpected and
prolonged contractions as they have in Japan over the past
To answer his question, most people didnt know. They were too
high on irrational exuberance to see it.
Of course, hindsight reveals that the stock market went
completely overboard on the upside, before contracting.
The age of irrational exuberance, as Greenspan termed it, had
But what was it exactly?
Theres no easy way to describe irrational exuberance.
Partly, thats because its self-explanatory. It describes a
baseless giddiness about a rising market. One that acts like a
vacuum, sucking investors into its vortex.
But it doesnt tell you everything about whats really
When dealing with psychology, many people view human behaviour
Yet while people are indeed irrational, theyre often
We all operate through identifiable patterns of behaviour. You
can just about guess what someone will do in any given situation
knowing very little about them.
In the case of the dotcom mania, investors were at first
overjoyed as stock prices boomed to high heaven. Predictably, more
capital piled into the market on the back of this.
They then became dismayed as they watched their wealth go up in
We saw this play out again in the crypto market late last
It shouldnt have been a surprise. This is what people do. They
get swept up in the moment. And allow emotions to take over.
Greenspan wasnt wro...