Popular stories that go viral aren’t always frivolous stuff. Some can move markets and drive decisions about how and when to invest. In an interview with ThinkAdvisor, Yale economics professor and Nobel Prize winner Robert Shiller argues for economists to pay more attention to what he terms narrative economics, whose stories have the power to predict financial crises and mitigate their damage.
He shares, too, the strategy for his personal investing and reveals some of what’s in his portfolio.
The bestselling author of “Irrational Exuberance” (2000, 2005, 2016), who predicted the dot-com debacle and the housing crisis, has just released a new book, “Narrative Economics: How Stories Go Viral and Drive Major Economic Events” (Princeton – Oct. 1, 2019).
Social media has certainly expanded the volume and contagion of popular narratives, some of which have grown into full epidemics that “can change the economy’s direction,” Shiller maintains.
In the interview, he discusses a number of specific narratives, including fear that artificial intelligence will replace human intelligence; the shoeshiner who gave stock tips in the Great Depression; and “the Trump narrative,” which, he says, the president has developed during the last five decades.
ThnkAdvisor recently spoke with Shiller, on the phone from his office at Yale. Joint winner, with Eugene Fama and Lars Peter Hansen, of the 2013 Nobel Memorial Prize in Economic Sciences, the professor is also an entrepreneur: Since 2010, he has collaborated with Barclays Bank on a series of equity sector indexes, which he and the firm design. In 2012, they introduced the Shiller Barclays CAPE Sector Index Family.
Here are highlights of our interview:
THINKADVISOR: What’s the difference between behavioral economics and narrative economics?
ROBERT SHILLER: Behavioral economics usually tries to look at established human traits to explain why people make mistakes. Narrative economics looks at how people change opinions that affect their actions and how these spread from one person to another.
Just what is an economic narrative?
Typically, it’s an illustrative story, often involving celebrities. The stories are frequently patriotic and sometimes heighten a sense of injustice or make people angry or make them laugh. They have to be contagious [go viral] — spread by newspapers, magazines, TV, social media — to succeed as narratives.
Does the celebrity component make a narrative more contagious?
Yes — and more dramatic. In his 1933 inaugural address, Franklin D. Roosevelt said, “The only thing we have to fear is fear itself,” which was an interpretation of the Great Depression. But he wasn’t the first to say that. One of the others was the assistant to the mayor of Boston, who nobody had ever heard of. So the guys that said it before Roosevelt didn’t cut it. But when he said it before a crowd of hundreds of thousands, it was a story that people remember to this day.
Do narratives have to be true?
No. It may help [contagion] if they aren’t because rarely do people check the facts. They just repeat what they’ve heard. [However], narratives can be true. They can point out facts that haven’t been paid attention to, and that can affect people’s judgement.
The Great Depression was a narrative that exploded during the financial crisis [2008-'09]. People already knew that narrative, but it became contagious again when it seemed that maybe [another deep depression] was happening, which caused them to curtail their spending.
What’s a modern narrative that’s gone viral?
The Trump narrative, which has really taken over. He developed and perfected this narrative over half a century. It is: The ideal man isn’t afraid to show off. He’s adorable to women. This impresses a lot of men who like to imitate men that are followed by a trail of beautiful women. Trump developed this narrative, including the story that he isn’t politically correct — that he would speak the truth — and that everything you heard out of Washington was a pack of lies.
What are the implications of his narrative?
One thing it seems to mean is that you don’t have to worry about modesty. So people are willing to spend money extravagantly and feel like they have to because Trump’s attitude toward losers is dismissive — they’re worthless.
Regarding the impeachment inquiry, Trump insists he’s done nothing wrong and that he thinks he has the right to do whatever he wishes in executing the office of president. Is this a narrative?
It’s part of a constellation of narratives. People just seem to relish telling stories about Trump. It’s probably his audacity, but he has an instinct of what is a tellable story. He knows that being a self-made billionaire is very central to his story. That’s why he doesn’t want to release his tax returns — it might raise questions about whether he really is a self-made billionaire.
What’s another Trump narrative?