This is a comprehensive summary of “Narrative Economics” by Robert J. Shiller. The book explores how stories go viral and drive major economic events.

what’s in it for me? discover how narratives drive economic events.#

Introduction

robert j. shiller.

narrative economics.

how stories go viral and drive major economic events.

narrated by oliver maines and alex vincent.

have you ever wondered why financial markets and economies sometimes behave in strange ways?

well, many economists will tell you that it's all about numbers and statistics.

the only way to understand the economy, therefore, is by interpreting these statistics.

but here's the thing.

the people who drive our economies, the consumers, the business people, the politicians, are more complicated than any set of statistics can reveal.

they have their own passions, biases, and belief systems.

simply put, they have their own stories.

stories that change the way they behave, in turn impacting the way that money behaves.

when these stories become popular, they're instrumental to economic outcomes, whether that's by causing panic during a stock market crash or leading rookie investors to load up on bitcoin.

however, stories are generally absent from economic analysis.

narrative economics is a new way of taking these collective stories into account.

in these chapters, we'll take a closer look at this concept and learn how popular narratives drive economic events.

narrative economics considers the collective stories that change economic behavior.#

chapter 1 of 8.

when you watch an economist on tv, you'll notice that they always speak in figures.

you'll hear them use terms like gdp or inflation, describing a past stock market crash or an impending recession.

in an economist's world, it can often seem as if the economy lives independently from the rest of the world, on a purely numerical plane.

economists rarely, if ever, try to explain the economy by referring to people's fears, hopes, or prejudices.

and they'll often leave out our messy human stories, which are just as crucial to understanding big economic events.

that's where narrative economics comes in.

the key message here is, narrative economics considers the collective stories that change economic behavior.

first, to understand the phrase narrative economics, we need to consider the modern use of the word narrative.

rather than simply referring to something with a beginning, middle, and end, a narrative can describe a collective story or belief shared by a group of people.

take the shrewd businessman, a popular narrative in the united states.

in fact, donald trump capitalized on it to appeal to voters.

whether or not trump is a shrewd businessman doesn't matter.

he successfully hitched himself to this narrative and played up his credentials as a tough, wily operator who'd get the best deal for the country.

and of course, that particular narrative had a real effect.

it helped donald trump get elected president.

now, take the stock market crash of 1929.

in the years before the crash, there were lots of popular narratives flying around.

there were stories of ordinary people gambling all their savings on a particular stock and becoming enviably rich.

of course, this led more and more people to make bad investments, culminating in the big crash on october 24, 1929.

narratives should form part of our understanding of any big economic event.

but often, they don't.

while economists have rarely focused on stories, there has been one notable exception, cambridge economist john maynard keynes.

rather than simply refer to figures, keynes made a note of public feelings at play.

in his book economic consequences of the peace, he predicted that germany would become deeply embittered by the heavy reparations they were required to pay after world war i.

no purely quantitative analysis could have told us that.

the rise of bitcoin illustrates the power of narrative in economics.#

chapter two of eight.

in late 2008, someone calling themself satoshi nakamoto posted a link to a paper they'd written called bitcoin, a peer-to-peer electronic cash system.

from that moment, excitement grew around this mysterious innovation.

while nakamoto's true identity has never been revealed, their invention, the cryptocurrency bitcoin, has become a phenomenon.

bitcoin has a complex and impressive mathematical theory behind it.

but rather than the precise technical achievement that underpins the cryptocurrency, it's mystery and excitement that drives interest in it.

the key message here is, the rise of bitcoin illustrates the power of narrative in economics.

if you were to approach most bitcoin investors and ask them about the technology behind the cryptocurrency, like the merkle tree or the elliptical curve digital signature, it's likely you'd be met with blank stares.

instead, what excites most bitcoin investors is the narrative around it.

it's the promise of a new way of doing things, far removed from the old currencies, displaying their dead kings, queens, and presidents.

in short, it's the promise of the future.

these investors believe that if they invest in bitcoin, they'll have a stake in this future, which promises to be dizzyingly futuristic.

just by buying into the cryptocurrency, they feel that they'll be among the enlightened and technologically astute, rather than being left behind with everyone else.

another popular idea attached to bitcoin is the notion of a currency that's outside the control of big banks and governments.

this appeals to an anarchic streak in its investors, who believe that these institutions have become corrupt and inefficient.

and as the currency doesn't belong to any one country, it appeals to an idea of internationalism.

bitcoiners think of themselves as savvy, future-oriented citizens of the world.

from the mysterious founder to the complex math to the idea of a futuristic new world embodied in a currency, bitcoin is an attractive story.

and without this story, it's unlikely that the cryptocurrency would have been as contagiously successful, attracting millions of investors.

it's the perfect illustration of the power of narrative in the world of money.

the study of epidemics can tell us a lot about economic narratives.#

chapter 3 of 8 think of all the different departments at a university.

anthropology, literature, physics, mathematics, economics, and so on.

all of them highly specialized, all on-earth infrastructure, all unearthing wonderful insights in their respective fields.

but this over-specialization can be an obstacle, a narrow focus.

instead, by working together, these different departments can enrich one another.

and one area from which economics could learn a great deal is epidemiology, the study of epidemics.

the key message here is, the study of epidemics can tell us a lot about economic narratives.

by looking closely at how diseases spread, we can gain some insight into narrative epidemics.

take a contagious disease, like ebola or a strain of coronavirus.

there's a contagion rate, a recovery rate, and a death rate.

when the epidemic is rising, the contagion rate, which counts all those newly infected, outnumbers both the recovery rate and death rates.

and when the epidemic is dwindling, the process is reversed, and those recovering or dying outnumber new cases.

this pattern can also be applied to contagious economic narratives.

contagion occurs from person to person through conversation, whether through face-to-face contact, social media, or other communications technology.

it also spreads through news outlets, talk shows, and the whole media ecosystem.

at first, the rise occurs rapidly.

then, just like a disease epidemic, there's a slowing process.

but rather than recovery or death, people lose interest or forget.

when these people outnumber those who are contagious, those spreading the narrative, the story dies quite quickly.

bitcoin, again, provides a great example of the parallels between a disease epidemic and contagious economic narrative.

if you look at how frequently the word bitcoin has been used in the news and in newspapers across the world over the last 10 years, you'll see a rapid increase around 2013, and then a sudden spike and peak in 2018, before it falls away again.

although we haven't seen the end of the bitcoin story yet, the graph shows us a rapid rise and decline that looks very similar to the shape of a disease epidemic, even matching the secondary waves that occur after the initial spike.

so disease epidemics and narrative epidemics follow a similar shape.

what's the use of knowing this?

well, by studying the pattern of epidemics, we can get ahead of certain contagious stories and model our economic and political responses accordingly.

sometimes, a story only gains momentum when it connects with other stories.

narratives often occur in constellations with other narratives.#

for instance, let's say your next-door neighbor is an antisocial grouch who puts spikes on their garden fence to deter cats.

if a cat in your neighborhood suddenly went missing, the narrative that your neighbor hates cats would suddenly seem more important.

you might begin to notice other relevant details about your neighbor that would feed into your overall impression of them as an essentially miserable person, regardless of how you view them.

this is because narratives rarely happen alone.

they're often part of a wider net of related stories.

the key message here is, narratives often occur in constellations with other narratives.

take the example of the laffer curve, a theory associated with the economist arthur laffer.

it's a diagram that shows an upside-down u, demonstrating the shape of a disease epidemic.

the curve is a function of the number of stories that show an upside-down u, demonstrating that lower taxation yields more tax revenue than higher taxation.

however, when the idea was first suggested, it didn't gain momentum.

it took a famous incident at a restaurant in 1974 for it to take off.

at this dinner, arthur laffer reportedly drew the famous diagram on a napkin and showed it to republican politicians donald rumsfeld and dick cheney.

this story of the economist urgently wanting to share his idea stuck with people.

then, the simple, tax-cutting logic of the laffer curve fed into the popular idea that governments and bureaucracies were inefficient.

the mistrust of big government was skillfully stoked at the time by conservative politicians like ronald reagan and margaret thatcher, who jumped on the opportunity laffer presented.

the laffer curve also became well-known at the same time that the books of ayn rand were gaining popularity.

her best-selling novel, atlas shrugged, told the story of a group of business leaders and other productive individuals who disappear in protest against the government, a government which they believe restricts their innovation with heavy taxes and regulations.

in relation to the politics of reagan and thatcher and the novels of ayn rand, the laffer curve made perfect sense.

each of these related narratives lent weight and context to the others, bolstering the idea that government interference and taxation was a negative thing.

all of this means that when we seek to understand one popular narrative, we must always be careful not to miss the constellation of related ideas that surround it.

otherwise, we'll only see a tiny part of a much bigger picture.

link 5 of 8 we can't help it.

economic narratives often hinge on particular, vivid details.#

we look to form narratives wherever we can.

as the philosopher jean-paul sartre wrote, a man is always a teller of tales.

he sees everything that happens to him through them.

in other words, our minds shape everything into narrative.

but to form narratives, we need to hang them on particular human details.

take the example of a controlled experiment conducted in 1985 by cognitive psychologists brad e. bell and elizabeth f. loftus.

participants took on the role of jury members.

the goal was to see if particular, vivid details had any bearing on the way court cases were decided.

so, fictional cases were presented with and without vivid details.

in one of these cases, the accused was said to have accidentally knocked over a bowl of guacamole onto a white shag carpet during their crime.

that detail, seemingly irrelevant, helped obtain a conviction from the experimental jury.

this image allowed them to form a concrete picture of the whole crime narrative, which would have been a dry, colorless account otherwise.

the key message here is, economic narratives often hinge on particular, vivid details.

in economic terms, particular details can help build narratives that have dramatic effects.

think back to the terrorist attacks of 9-11.

at the time, the u.s. economy was in the middle of a recession, and when the world trade center was destroyed and the pentagon badly damaged, many economists feared that this would further erode confidence in the economy.

it seemed certain.

all the indicators pointed to further pain.

however, by november, astonishingly, the recession was over.

what happened?

it appeared the american people, having watched the vivid spectacle of the attack on those symbolic buildings, had taken the seemingly inevitable narrative of a further recession and turned it around.

one significant event was when president george w. bush addressed the nation.

he encouraged people to move past their fear.

do your business around the country.

fly an enormous plane.

do your business around the country.

fly and enjoy america's great destination spots.

get down to disney world in florida.

rather than accept continuing recession, the american people had built their own narrative around these vivid details.

u.s. businesses and the whole economy responded accordingly.

the dramatic attack and george w. bush's rousing speech had spurred them on to resist the seemingly inevitable economic slump.

there are perennial economic narratives that occur again and again.#

one very common economic narrative is that of panic versus confidence.

you'll often hear journalists, politicians, and economists talk about confidence.

confidence in businesses, banks, and the broader economy.

for economies to thrive, confidence in other people is essential.

just as author christopher booker theorizes that stories follow one of seven basic plots, such as rags to riches or overcoming the monster, there appear to be economic narratives that crop up time and time again.

the key message here is there are perennial economic narratives that occur again and again.

so let's get back to the narrative of panic versus confidence.

where did this story originate?

in the united states, there seems to have been a financial panic in 1857 in the run-up to the u.s. civil war, where the idea gained popularity.

then, the use of the word panic to describe financial crises peaked after the famous panic of 1907, involving the celebrity banker j.p. morgan, who used his own money to help bail out the banking system.

the obvious flip side of a collective panic is one of collective confidence.

the importance of confidence as a developing narrative can be seen in the statements of president calvin coolidge.

in an attempt to bolster public belief in the stock market in the 1920s, coolidge would give optimistic public addresses about the state of the economy even when, in reality, things weren't looking so good.

since these early beginnings, the panic versus confidence narrative has remained a part of the economic story.

think back to the economic crisis of 2008.

you could argue that a historical memory of previous panics was a key factor.

a related narrative is the stock market crash.

it was the stock market fall of 1929 that gave us the notion of the crash.

before that point, the phrase boom and crash was only used in relation to, say, the sound of thunder or the dramatic music of wagner.

but the dramatic impact of the 1929 crisis employed the word crash to refer to the plummeting stock market.

the stock market crash narrative came back with a vengeance in 2007 through 2009 during the great recession.

just as with the 1920s, the idea that the crash was the inevitable punishment for a period of reckless speculation returned.

these narratives, which have their roots in events long ago, shape current events.

if we're to have a better understanding of what's happening now, we need to recognize that what we're experiencing is often a mutation of one of these perennial stories.

the economic impact of narratives may change through time.#

we all have memories that subtly change over time.

a distant birthday party, a summer road trip with friends, a drunken holiday.

these memories can reappear to us throughout our lives, subtly different, and cause us to reappraise them completely.

so that dreadful time you sprained your wrist while bowling becomes a wonderful evening.

as with life, so with economics.

the collective narratives around economic events can change through time, altering our whole understanding of them.

the key message here is the economic impact of narratives may change through time.

the memory of the october 19, 1987 stock market crash still lingers.

it was the biggest one-day crash in percentage terms in history.

recalling it is enough to dent the confidence of even the most bullish investor today, because what happened before could always happen again.

and journalists are still writing lengthy articles and think pieces about it, especially on its anniversary.

however, the real event and the memory of the event are different.

because at the time, there was a great deal of discussion about a computerized trading program called portfolio insurance.

it used algorithms to limit an investor's loss from a plunging market.

narratives around this led many people to consider selling their stocks at the time, worsening the decline.

because of these particular circumstances, the crash of 1987 bears little relation to market conditions in the present day.

yet many people forget this, and by spooking investors, 1987 still manages to affect us in some way.

similarly, the memory of world war i mutated into something different at the beginning of world war ii and caused people to act differently.

at the start of world war i, investors responded with panic and irrationality.

european investors, for instance, shipped massive amounts of gold out of the united states, even though the united states wasn't yet a part of the war and the stock market began to fall steeply.

however, as world war ii began on september 3, 1939, the s&p stock market index rose by 9.6%.

why?

by this time, a very different narrative about world war i had become popular.

many people believed that those who'd held on to investments during the war had become rich.

so between 1918 and 1939, a completely changed narrative of the first world war had caused people to act in a dramatically different way.

chapter 8 of 8.

as we've learned, narratives are important when it comes to the economy.

research into narratives can help us prepare for economic events in the future.#

to help predict downturns, boom periods, and anomalies alike, it's necessary that economists take them seriously.

it's simply not enough to use statistics.

so, economists and researchers should use tools available to them now to understand narrative better.

we're able to access unprecedented volumes of data and see what occupies the minds of people all over the world.

we can trawl through internet searches, see what people are saying on social media, and learn from focus groups and other types of market research.

never before has so much in the way of opinion, feeling, and personal preference been recorded.

technology allows us to search books and newspapers for key words and phrases at the click of a button.

by using tools that can find patterns in this ocean of data, economists should be able to identify prominent narratives that may have a causal effect on the economy.

the key message here is research into narratives can help us prepare for economic events in the future.

however, it's important that real rigor is applied when using narratives to theorize about economic events, just as more quantitative economists do.

otherwise, the process will just be lazy, unscientific speculation.

to do this, lessons can be learned from other disciplines that specifically study narrative, like the humanities.

narratives can also be analyzed by learning from developments in neuroscience, psychology, and artificial intelligence.

so, what can be done with all this new information?

by better understanding narratives, policy makers will be able to shape people's behavior in times of great stress.

president roosevelt understood this, even in the 1930s.

during the great depression, roosevelt knew that a collective lack of confidence was an important factor for the economy.

in response, he addressed the nation in a series of fireside chats, where he asked people to set aside their fears and go out and spend money.

by doing this, he took control of the narrative, and it seemed to work.

each time he addressed the nation, the market steadied.

if policy makers are able to read the constellation of narratives around an approaching or present economic event, they can get a great head start.

and from that vantage point, they can be active participants in events rather than hapless bystanders.

you've just listened to our chapters to narrative economics by robert j. schiller.

final summary#

Conclusion

economic events, like stock market crashes and sudden investing crazes, are often driven by popular narratives.

these narratives occur together in constellations, with each one reinforcing the others.

by considering narratives as part of our economic analysis, along with more traditional economic data, we can be better prepared for what the future might throw at us.

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