Robert Shiller. (Photo: AP) Robert Shiller. (Photo: AP)

Beyond the macroeconomic data that measures the state of the economy are the stories told over and over again, gaining traction and actually impacting growth and the markets.

Nobel Memorial Prize-winning economist Robert Shiller calls this “narrative economics.”

“What drives the economy substantially are stories,” said Shiller in a talk at the Inside ETFs conference in Hollywood, Florida. “The human mind is oriented to stories, [but] economics is behind most social sciences in recognizing the importance of narrative.” It’s those stories that influence behavior, which has become the basis of behavioral economics.

In an economics paper Shiller published almost two years ago, he explained that “I’m starting now, with my more recent work, to think that we have to look at the humanities as well. … one way to do that is with an approach that I’m calling ‘narrative economics’: taking economics and adding the study of the narratives that people transmit … engaged in conversation.”

At the ETF conference, Shiller gave examples of these narratives: “the Great Depression, the sad story of the 1930s after the ‘29 crash” which people thought would never end, and the Great Recession in 2007-2008, which took its name from the economic upheaval more than 70 years earlier because people were worried about another Great Depression, Shiller explained. These narratives can go viral and did so even before the internet, he said.

“Now part of narrative driving the U.S. is the Donald J. Trump narrative,“ said Shiller, adding that Trump was a major topic of conversation at the World Economic Forum in Davos, Switzerland, that he attended last month.

“Whether or not you like him, you want to hear about him; [Trump] has captured the imagination,” Shiller said. “He’s driving the market substantially and the rest of the economy. Unfortunately, it’s not that stable a situation, and there could be a major correction.”

Another current narrative, according to Shiller: people worried about labor income and looking for investments to provide them money.

In the middle of last year the narrative was “that this was the longest bull market ever,” said Shiller. “That encourages people to start doubting it will keep going on.”

Jeff Sherman, deputy chief investment officer of DoubleLine, who was on stage with Shiller, said the Federal Reserve is also part of the current economic narrative as well as the market itself. “What is momentum, but a narrative that things will continue to be good or things will continue to be bad?”

The market narrative is “always looking for new things,” Sherman said. Two years ago it was cryptocurrency; last year, marijuana, he said. “Who knows what will be popular next? Investors are not happy with 3% or 5% returns.”

Sherman said the narrative for the market has three parts: fundamentals that will ultimately come home to roost; technicals that help help execute trades, supply and demand and money flows; and FOMO — fear of missing out.

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