e all love a good story. Stories are important to understanding our world since we were toddlers. It doesn’t end there. We are life-long narrators. It turns out that we remember things more easily if they are in the form of a story or narrative rather than as unconnected fragments of information. We appear to have a hardwired need to narratives to impose order and find causality in the past and present, which we project to the future, even in situations that lack them. These narratives often result in selective memory, distortion of the past and manipulation of facts. Unfortunately, we base many important decisions on the impressions we gain from these narratives. (This is certainly no news to marketers and politicians who generate stories that sell their products, whether shoes or policies.
In a previous post, I presented the Narrative Audit, a framework for analyzing narratives by separating the factual elements from the false elements and assumptions. I applied this approach to the Credit Crisis of 2008 with some interesting results.
Robert Shiller's Narrative Economics
Nobel Prize winner Robert Shiller has written an extensive article (Narrative Economics, January, 2017) in which he provides a framework for systematically applying narratives to economic decisions and outcomes. He describes narratives as follows: "a simple story or easily expressed explanation of events that can be used to stimulate the concerns or emotions of others, and/or because it appears to advance self-interest."
Shiller's main points are that 1) narratives play an important role in influencing economic outcomes, including depressions, recessions, bubbles, panics, etc. 2) at times, stories may be more important than economic factors in explaining the depth and duration of a recession, and more. 3) despite the obvious importance of narratives, economists have paid little attention to them, possibly because of the difficulty they present to modeling or quantifying.
The stories people tell can become viral -- transmitted by word of mouth, by the news media, and increasingly by social media -- and move markets and outcomes. For example, stories such as housing prices never go down, tech stocks only go up, or some firms are too big to fail have influenced major events and driven important decisions.
The stories people tell—about economic confidence or panic, housing booms, the American dream, or Bitcoin—affect economic outcomes. Whether true or false, stories drive the economy by driving our decisions about how and where to invest, how much to spend and save, and more.
Shiller applies his theory to the understanding of events by providing extensive treatments of the role of narratives to the "the Depression of 1920-21, the Great Depression of the 1930's, the Great Recession of 2007-2009, and our present time right after our narrative-filled 2016 presidential election."