Irrational Exuberance in 2025: Protecting Your Wealth from Market Hype

When the phrase ‘irrational exuberance’ was first coined by Alan Greenspan in the 1990s, it captured a phenomenon as old as the stock market itself: the tendency for investors to drive asset prices far beyond their intrinsic value. Fast-forward to 2025, and the echoes of exuberance are reverberating through Australian markets once again. Whether it’s the surging interest in AI-driven stocks, property price spikes in regional hubs, or the relentless optimism around renewable energy investments, the warning signs are there for anyone willing to look past the hype.

What Is Irrational Exuberance—and Why Does It Matter in 2025?

Irrational exuberance describes periods when investor enthusiasm outpaces underlying economic fundamentals, leading to overvalued markets and, often, painful corrections. In Australia, the last few years have been a case study in this dynamic. The post-pandemic bull run, turbocharged by record-low interest rates and generous government stimulus, saw asset prices soar across equities, crypto, and real estate.

But with the Reserve Bank of Australia (RBA) holding cash rates at a steady 4.35% through mid-2025, and lending standards tightening, the tide is turning. The question is: are investors prepared for the reality check?

• Tech and AI stocks: ASX-listed tech firms have seen price-to-earnings ratios balloon, with some trading at over 50x earnings, reminiscent of the dot-com era.

• Property market: Regional property prices jumped by more than 20% in some towns since 2022, often without corresponding growth in local incomes or rental demand.

• Green energy: Battery minerals and renewables stocks have attracted speculative flows, pushing valuations beyond what current earnings support.

The Psychology Behind Market Hype

So why do otherwise rational investors get swept up in the tide? Behavioural finance points to a cocktail of cognitive biases—herd behaviour, FOMO (fear of missing out), and recency bias—that can override prudent analysis. Social media and instant trading apps amplify these tendencies, allowing hype to spread faster than ever before.

Case in point: the surge in retail investor trading volumes on platforms like Stake and SelfWealth, with new account openings hitting record highs in early 2025. For many, the temptation to chase the latest hot sector can be overwhelming, especially when stories of overnight fortunes dominate the news cycle.

• Confirmation bias: Investors seek out information that supports their bullish outlook, ignoring warning signs.

• Overconfidence: Rising prices lead to overestimation of skill and underestimation of risk.

• Social proof: When everyone seems to be making money, sitting on the sidelines feels like missing out.

Protecting Your Portfolio from Exuberance

While it’s tempting to ride the wave, history shows that booms fuelled by irrational exuberance rarely end well for latecomers. The ASX correction of 2020 and the crypto bust of 2022 are fresh reminders. In 2025, as regulators warn of potential asset bubbles and the RBA signals a ‘higher for longer’ rate environment, taking a level-headed approach is more important than ever.

Consider these strategies to keep your financial future on track:

• Revisit your asset allocation: Diversify across sectors and asset classes to reduce exposure to overheated markets.

• Focus on fundamentals: Scrutinise company earnings, balance sheets, and industry trends—not just price charts or headlines.

• Set clear investment goals: Avoid making decisions based on short-term hype. Define your risk tolerance and time horizon.

• Stay alert to policy signals: Watch for RBA statements, APRA lending guidelines, and ASIC warnings about speculative activity.

• Don’t be afraid to take profits: Locking in gains can be a smart move when valuations start to look frothy.

Above all, remember that the best opportunities often appear when the crowd is running in the opposite direction.

Conclusion: Stay Grounded in a World of Hype

Irrational exuberance is part of the market’s DNA, but it doesn’t have to derail your financial goals. By understanding the forces at play in 2025’s investment landscape, staying anchored in fundamentals, and resisting the siren song of hype, Australian investors can navigate volatility with confidence. The next market correction is never far away—but with the right mindset, you’ll be ready when it comes.