In 1985 Brad E. Bell and Elizabeth F. Loftus did a controlled experiment to find out how subjects playing the role of jury members responded to different presentations of the same evidence. The result was that vivid narratives full of colorful detail were far more effective than bland presentations of fact. In one example, they inserted an entirely irrelevant sentence about the defendant knocking over a bowl of guacamole dip onto a white shag carpet at the time of the crime. While the guacamole was completely unrelated to the case, the vivid image of the white shag carpet being ruined helped to obtain a conviction.
The point here is that people love a good story — even jurors instructed to focus only on the facts. And that is why Robert Shiller includes the above study in his new book, Narrative Economics, which is all about how popular narratives help explain economic events in a way that traditional economics can’t.
Classical economics assumes that individuals are perfectly rational decision makers seeking to optimize according to a budget constraint. Yet, behavioral economists have done a lot of work to show that we fall far short of being rational optimizers. As Shiller said at a talk I recently attended at the University of San Francisco, what do you talk about when you get together with friends for dinner? Optimizing according to a budget constraint? No, you gossip and tell stories you know will resonate with others. Some of these stories spread like a contagion and when they do, they “ultimately affect decisions, such as how and where to invest, how much to spend or save, and whether to go to college or to take a certain job.”
To Shiller, the problem with traditional economics is that it fails to examine the role of public beliefs in major economic events (Shiller’s italics). In contrast, narrative economics, “the study of the viral spread of popular narratives that affect economic behavior,” does just this. Shiller says that popular narratives go a long way toward explaining events like the Great Depression and the dotcom stock boom of the late 1990s.
Shiller uses models from epidemiology on how diseases spread to understand why certain narratives go viral — and note, stories have been going viral way before the age of the internet or social media. Shiller reaches deep back into historic archives to come up with some fascinating examples, and in one case, he draws parallels between the story on bitcoin (anti-establishment, cool, cutting-edge) with the emotionally-charged dialogue on bimetallism in the late 1800s, (bimetallism was about using both a gold and silver standard).
When I heard Shiller speak in San Francisco, he noted that President Trump — whatever your opinion of him — has probably had a positive narrative effect on economic growth because he has modelled conspicuous consumption and the story of the optimistic billionaire. Shiller also said that the narrative on automation and AI taking over our jobs has the potential to get overhyped. Automation advances are real – but they’ve also been real throughout history. Aristotle talked about the rise of machines, and so did Stuart Chase in his widely read 1929 book Men and Machines.
Perhaps the most interesting narratives that came up in Shiller’s talk were not about narrative economics at all, but rather, his long experience as an economist. He talked about winning the Nobel Prize in 2013 (a big deal, even for a humble Noble Laureate) – and how he came to write the editions of Irrational Exuberance, which predicted the dotcom stock crash and the 2008 housing crisis. But what I really liked was his brief life advice to students: 1) study finance even if you’re not a finance major because it’s the study of how things get done, 2) study economics, 3) learn history, read literature and broaden yourself, and 4) seize the day.