Narrative Economics by Robert Shiller [Book Summary – Review]


Have you ever given it a thought about what the reason behind financial markets and economies occasionally work in bizarre manners is? After all, most economists will explain that everything concerns numbers and statistics. The sole method to comprehend the economy, thus, is through the interpretation of these statistics.

However, there is a problem. Those who are behind our economies – the consumers, the businessmen and -women, the politicians – are a lot more complex than any statistics sets can unveil. Those different groups have got their desires, prejudices, and belief systems. Put differently: everyone has a tale of their own – tales that transform how they act, thus influencing how money behaves.

After these tales begin to be wide-known, they become influential in economic results – they may lead to panic at the times of a stock-market crash or cause novice investors to make investments on Bitcoin. But, stories remain usually without economic analysis. 

Narrative economics is a novel manner of examining these combined stories. You’re going to learn more in detail about this concept and the way wide-know narratives push economic events.


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Chapter 1 – Narrative economics thinks of the combined tales that shape economic behavior.


If you see an economist on air, it’ll catch your attention that economists talk by using figures virtually all the time. You’ll notice that they employ words such as “GDP” or “inflation” while talking about a past stock-market crash or an imminent recession.

In the world of an economist, it usually appears as though the economy has a life of its own, separate from the world, in a thoroughly figure world. Economists seldom, if it happens, attempt to describe the economy by including human fears, hopes, or bias in their discussion. Furthermore, economists usually exclude our complicated personal stories that are no less vital to grasping huge economic events. Narrative economics is useful at this point. 

For starters, to comprehend the term “narrative economics,” it is necessary to think about the contemporary usage of the word ‘narrative’. 

Instead of merely talking about something with a start, development, and conclusion, it is possible to use a narrative to talk about a combined story or belief experienced by a set of people. Look at the phrase “shrewd businessman,” which is a well-known narrative in America. Actually, Donald Trump took advantage of it to attract voters. It isn’t important if Trump counts as a shrewd businessman or not – he managed to attach his name to this narrative and put all his energy into his credentials as a strong, crafty executive who’d arrange the most optimal deal for America.

Moreover, certainly, that specific narrative manifested itself in real life. It assisted Trump to become the new resident of the White House. 



Now, think about the Great Depression. A few years prior to the market crash, it was possible to hear many narratives flying around. People were hearing the stories of common people putting the whole of their savings on a specific stock and turning into enviably wealthy. Naturally, this brought about an increasing amount of people to make poor investments, which ended up as a huge crash on October 24, 1929.

It is important for narratives to be a component of our comprehension of any huge economic event, however, they usually don’t. Though economists have seldom concentrated on narratives, it is possible to name one striking exception – Cambridge economist John Maynard Keynes. Instead of just talking with numerical data, Keynes took into account people’s feelings at play. In his work Economic Consequences of the Peace, Keynes foretold that Germany would begin to be very much angered due to the substantial war reparations that the Allied states forced her to pay following World War One. There is no solely quantitative analysis that could’ve foreseen that.


Chapter 2 – The emergence of Bitcoin shows the influence of narrative in economics.


In late 2008, a person whose name was Satoshi Nakamoto shared a link to a paper on which they’d written and known as Bitcoin: A Peer-to-Peer Electronic Cash System. Since then, excitement mounted around this puzzling novel development. Though we still don’t who Nakamoto actually is, their development – the cryptocurrency Bitcoin – has begun to turn into a phenomenon. 

There is an intricate and spectacular mathematical theory behind Bitcoin. However, instead of the fully accurate technical success that supports the cryptocurrency, it’s enigma and excitement that increases attention to it.

Were you to go to many Bitcoin investors and pose them a question regarding the technology behind the cryptocurrency, such as the “Merkle tree” or the “Elliptical Curve Digital Signature,” probably they won’t even come close to understanding what you say. 

Rather, the thing that thrills many Bitcoin investors is the story surrounding it. Bitcoin asserts a new mode of doing stuff – highly distinct from the traditional currencies that show their former kings, queens, and presidents.

To sum up, Bitcoin will make up a new thing in the future. These investors think that should they make investments in Bitcoin, they can get a share in this future that herald to be mind-blowingly futuristic. Solely by making investments in the cryptocurrency, those investors believe that they’ll have their place among the enlightened and technologically intelligent, instead of lagging behind with all other people.



One other well-known idea associated with Bitcoin is the thought of a currency that cannot be regulated by huge banks and governments. This lures an anarchic group in its investors, who think that banks and governments have begun to be corrupt and ineffective. Furthermore, since no country holds the reins of Bitcoin, it stirs excitement with regard to a thought of internationalism. “Bitcoiners,” consider themselves as astute, future-focused citizens of the globe. 

From the obscure creator to the intricate math to the notion of a futuristic novel globe concentrated in a currency, Bitcoin constitutes an engaging narrative. So, if it weren’t for this narrative, the cryptocurrency would probably not have achieved contagious accomplishment, drawing the innumerable amount of investors. The cryptocurrency makes up an excellent example of the influence of stories in the world of the economy.


Chapter 3 – Research into epidemics has the capacity to explain to us much about economic stories.


Consider each diverse department at a college: anthropology, literature, physics, mathematics, economics, and so forth. Each department has high expertise in their fields, each uncovering astonishing insights in their own fields. 

However, this extreme-specialization has the potential to constitute an impediment, a narrow concentration. Rather, through collaboration, these diverse departments possess the potential to contribute to each other. And epidemiology is one field which economics could benefit a lot from – epidemiology encompasses the study of epidemics. 

Through examining in detail the way diseases scatter, we have the possibility to cultivate some insight into narrative “epidemics.” Let’s look at a contagious disease, such as Ebola or a sample of coronavirus. We see a contagion rate, a recovery rate, and a death rate. If the epidemic is spreading, the contagion rate – which sums each person lately infected – exceeds not only the recovery but also death rates. After this, if the epidemic is waning, vice versa happens, and those who are saved or pass away surpass the number of the newly infected. 

It is possible to use this pattern in contagious economic stories, too. Contagion takes place from one person to another via talk between them, be it a direct communication in real life, social media, or other technological platforms where you can talk. It can infect others by means of novel outlets, talk shows, and the entire media world. 



Initially, the spread of contagion takes place very quickly. After that, in the same way as a disease epidemic, the spread rate dwindles. However, instead of recovery or death, people aren’t any more fascinated or forget. If the number of those no longer interested exceeds that of the infected – people who talk about the story everywhere – the narrative vanishes rather fast.

Bitcoin, this time too, gives an excellent illustration of the similarities that are shared by a disease epidemic and contagious economic narrative. Should you examine how often the word “Bitcoin” has been employed in news and in newspapers everywhere in the globe for the last decade, you can notice a fast rise around 2013, then an abrupt spike and zenith in 2018, prior to its decline. While the narrative of the Bitcoin still lingers around, the graph demonstrates to us a fast increase and slump that resembles a lot the graph of a disease epidemic, even agreeing in the secondary “waves” that take place following the peak in the beginning. 

Thus, disease epidemics and narrative epidemics share a shape that carries similar qualities. How can we employ this knowledge? Well, through examining the pattern of epidemics, it is possible to solve particular contagious stories and shape our economic and political reactions in relation to these stories.


Chapter 4 – Stories usually take place in harmony with other stories.


Occasionally, a narrative starts to increase rapidly solely if it is attached to other narratives that link to it.

For example, suppose your neighbor is a grumpy anti-social sorehead who places spikes on the fence of their garden to prevent cats. Were a cat in the vicinity you live in to abruptly disappear, the story that your next-door-neighbor detests cats would quickly matter a lot and it could lead you to start to be wary of other pertinent details regarding your neighbor, contributing to your general thoughts about them as a basically worthless person – no matter what the cat actually had gone through. This follows from the fact that stories seldom occur on their own: they usually make up a component of a broader net of linked stories.

Look at the instance of the Laffer curve, a theory put forward by the economist Arthur Laffer. In his diagram, Laffer demonstrates an inverted U, showing that lower taxation generates more tax income compared to higher taxation. 



But, at the time this idea was first proposed, it didn’t have a sudden spike. Only after a well-known incident at a restaurant in 1974 could this idea peak. At the restaurant, Arthur Laffer, as reported, sketched the well-known diagram on a napkin and presented it to Republican politicians Donald Rumsfeld and Dick Cheney. This narrative of the economist eagerly desirous of sharing his concept imprinted on the memories of people.

After this, the basic, tax-reducing idea of the Laffer curve became the prevalent idea that states and bureaucracies were not efficient. The skepticism toward big state was masterfully used at the time of conservative politicians such as Ronald Reagan and Margaret Thatcher, who used the opportunity provided by Laffer. 

The Laffer curve began to be popular at the same time when the works of Ayn Rand were beginning to be prominent. Her best-selling book Atlas Shrugged narrates the story of several business managers and other creative individuals who vanish in protest against the government – a government that they consider as an obstruction to their innovation with burdensome taxes and regulations. 

If we think this together with the politics of Reagan and Thatcher and the novels of Ayn Rand, the Laffer curve sounds very logical. All of these connected stories gave emphasis and context to the others, reinforcing the notion that government interference and taxation were adverse.

All these indicate that if we try to comprehend one common story, it is constantly important not to overlook the link of connected ideas around it. If we miss it, the sole thing we have is a small element of a greater picture.


Chapter 5 – Economic stories usually rely on specific, rich details.


It is unavoidable – people seek to create narratives anytime they have the chance. Philosopher Jean-Paul Sartre once penned that “a man is constantly a narrator of stories…he understands anything that befalls him through them.” Put differently, our minds form everything into the story. However, in order to create stories, it is required to connect them to specific human details.

Look at the instance of a controlled experiment carried out in 1985 by cognitive psychologists Brad E. Bell and Elizabeth F. Loftus. Those who took part in the experiments were given the position of jury members. The objective was to understand should specific, vivid details had any relevance on how court cases were settled. Thus, the researches gave them fictional cases with and without vivid details.

In one case, the person on trial allegedly had inadvertently “knocked over a bowl of guacamole onto the white shag carpet” while committing their crime. That detail, which looks as though it hadn’t any bearing, assisted to get a conviction from the fake jury. This image enabled them to create a solid picture of the entire crime “story,” which would’ve been a colorless, dull story otherwise.

In the context of economics, certain details have the potential to assist to create stories that have dramatic impacts. Take the 9/11 attacks. When the attacks happened, the American economy was experiencing a recession. And after the World Trade Center was devastated and the Pentagon severely wroke havoc upon, most economists worried that this would reduce confidence more in the economy. Everything looked like obvious: every sign led to more pain. But, until November, surprisingly, the recession came to an end.



How? It seemed that the US citizens, after having vividly witnessed the attack on those emblematic structures, had gripped the apparently unavoidable story of a further recession and reversed it. One important event was the time that President George W. Bush gave a speech to the American people. He inspired everyone to get over their worry: “Do your business around the country. Fly and enjoy America’s great destination spots. Get down to Disney World in Florida.”

Instead of acknowledging the ongoing recession, the US citizens had formed their own stories around these vivid details. American businesses and the entire economy reacted in conformity. The dramatic assault and George W. Bush’s moving address to the nation had driven them toward standing against the apparently inescapable economic decline. 


Chapter 6 – There are continuing economic stories that recur over and over again.


One highly popular economic narrative involves panic versus confidence. We usually hear the press members, politicians, and economists mention confidence – confidence in businesses, banks, and the wider economy. If we want economies to prosper, confidence in other people matters a lot.

In the same way that the author Christopher Booker thinks that narratives stick to one of seven essential storylines – like “rags to riches” or “overcoming the monster” – there seem to be economic stories that recur.

Thus, now return the story of panic versus confidence. How did this narrative arise? In America, there appears to have occurred a financial panic in 1857, just before the American Civil War, in which the notion became very popular. Then, the usage of the word panic to explain financial crises climaxed following the widely-known Panic of 1907, which included the renowned banker J.P. Morgan, who spent his own wealth to assist the banking system to bail out. 



The apparent reverse side of a common panic is one of common confidence. The significance of confidence as a forming story can be noticed in the remarks of President Calvin Coolidge. In a try to reinforce people’s confidence in the stock market in the 1920s, Coolidge would speak positively in his public speeches regarding the situation of the economy, even if the economy was actually in a bad situation.

From these initial beginnings onward, the panic versus confidence story has constituted a component of the economic narrative. Look at the 2008 economic crisis – it is possible to say that the historical recollection of former panics played an important part.

A connected story is a stock-market crash. it was the Great Depression in 1929 that provided us with the idea of the crash. Prior to that moment, the expression “boom and crash” was solely employed in connection to, say, the sound of thunder or the dramatic music of Wagner. However, the drastic effect of the Great Depression used the word “crash” to talk about the free-falling stock market.

The stock-market crash story returned with revenge in 2007-2009, at the time of the Great Recession. In the same way as the 1920s, the notion that the crash was the unavoidable suffering for a time of heedless speculation resurfaced. 

These stories, having originated from events that took place long ago, affect present events. Should we want to grasp better what’s going on at the moment, it is necessary for us to become aware that what we’re undergoing is usually an alteration of one of these continuing narratives.


Chapter 7 – The economic outcomes of stories might alter over time.


All of us have recollections that subtly alter with time. A birthday party from a remote time. A road-trip with friends during one summer. A holiday when you got drunk. These recollections may resurface to us for the rest of our lives, a bit distinct from the original event, and lead us to reassess them altogether. In this way, that terrible time you injured your wrist in a bowling game turns into a great evening. 

The same thing in life goes for economics. The combined stories around economic events may undergo a transformation in time, changing our entire comprehension of them.

The recollection of October 19, 1987, stock-market crash continues to remain around. The stock market crash was the greatest one-day crash in the context of percentages in history. Remembering it is sufficient to hurt the confidence of even the most optimistic investor nowadays since what occurred previously could continually take place again. Moreover, the press continues to pen long articles and think-pieces regarding it, particularly on its anniversary. 

But, the genuine event and the remembrance of the event are separate. During the times when this event came about, most discussions centered around a computer-assisted trading program known as portfolio insurance. This program employed algorithms to curb an investor’s loss from a plummeting market. Stories surrounding this caused most people to think about selling their stocks at the time, aggravating the slump. Due to these certain circumstances, the crash of 1987 has not much connection with the market conditions of today. Yet, most of us forget this, and through frightening investors, 1987 continues to be able to influence us in some way. 



Likewise, the recollection of World War One transformed into something distinct at the start of World War Two and led people to behave differently. When World War One broke out, investors reacted with panic and unreasonableness. For example, European investors sent huge quantities of gold out of the USA, even if America wasn’t sided with anyone at that time, and the stock market started to plummet sharply.

But, after World War Two broke out on September 3, 1939, the S&P stock-market index increased by almost 10 percent. What was the reason for this? Until that moment, a highly separate story regarding World War One had gained popularity. Most people thought that those who’d retained the possession of investments at the time of the war had accumulated wealth. Thus, from 1918 to 1939, a totally transformed narrative of the First World War had led people to behave in a drastically distinct manner.


Chapter 8 – Studies about narratives have the potential to assist us to be poised for economic events in the future.


As you’ve seen, stories are essential when we think about the economy. In order to assist to foretell downturns, growth periods, and oddities as well, economists must regard them earnestly. It’s just not sufficient to apply to statistics.

Thus, economists and researchers should employ equipment they’ve got at hand today to comprehend the story better. It is possible to obtain incredible amounts of data and understand the thing that engages the minds of people everywhere around the globe. It is possible to get the results of internet searches, look at the things people are mentioning on social media, and extract information by way of focus groups and other sorts of market research. Only in those times in which we live has so much knowledge in the form of opinion, feeling, and personal inclination been registered. Technology enables people to examine books and newspapers for keywords and phrases by using just one click.

Through the employment of instruments with the capacity to detect patterns in this sea of data, it is possible for economists to recognize obvious stories that might have a causal impact on the economy. 

But, it’s essential that genuine effort is made while utilizing stories to make guesses regarding economic events in the same fashion that more quantitative economists do. If not, the process will simply be idle, speculation that has nothing to do with science. So as to do this, it is possible to benefit from other fields that particularly research narrative, such as the humanities. It is likely for stories to be examined by looking at developments in neuroscience, psychology, and artificial intelligence. 



Thus, how can we use this novel knowledge? Through a better comprehension of narratives, policy-makers will have the opportunity to form people’s behavior during highly desperate times. President Roosevelt was aware of this, as far back as in the 1930s. At the time of the Great Depression, Roosevelt understood that a collective loss of confidence constituted a significant factor for the economy. So, he gave a speech to the Americans in a chain of “fireside chats” in which Roosevelt wanted people to leave their worries behind and go outside and make shopping or buy something. With these chats, Roosevelt brought the narrative under his control, and he appears to have been successful – every time he gave a speech to the public, the markets steadied. 

When policy-makers manage to read the relations of narratives surrounding an impending or existing economic event, they have the opportunity to have a perfect advantage. So, from that starting point, policy-makers are able to proactively take part in events instead of watching everything from the outside.


Narrative Economics: How Stories Go Viral and Drive Major Economic Events by Robert J. Shiller Book Review


Events that take place in the economy, like stock-market crashes and abrupt investing fades are usually ignited by popular narratives. These stories come about collectively in constellations, with all of them underpinning the others. By thinking of stores as a component of our economic analysis as well as more conventional economic figures, it is possible to be better poised for events we may encounter in the future.



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