Robert Shiller on the power of narratives

Monday, November 4, 2019
portrait of Robert Shiller

Stories matter, shaping our beliefs, decisions, and actions. Nobel Prize-winning economist Robert J. Shiller sees this play out in the economy constantly.

We have to consider the possibility that sometimes the dominant reason why a recession is severe is related to the prevalence and vividness of certain stories, not the purely economic feedback or multipliers that economists love to model,” he said in a January 2017 address at the 129th annual meeting of the American Economic Association (AEA).

Shiller, Sterling Professor of Economics at Yale and a recent AEA president, urged colleagues to reflect on the power of popular narratives — simple stories, true and untrue — to influence booms, recessions, and other economic events. He suggested expanding the field of economics to include the quantitative study of changing popular narratives.

This would improve economic forecasts, he argued, and provide a clearer understanding of the complex forces driving economic change.

Shiller expands on this idea in his latest book, “Narrative Economics: How Stories Go Viral and Drive Major Economic Events.” He spoke with YaleNews about it.

Interview condensed and edited.

What is narrative economics?

In 1894, the Palgrave Dictionary of Political Economy included the term “narrative economics,” but it was defined as an economist writing a narrative, which is a sequence of events in history. That’s not how I’m using the term.

For me, narrative economics means studying the popular narratives that underlie people’s thinking, not just economists’ thinking. We have to know why people spend more in a boom and less in a bust. Why do they pay attention to the stock market? Why do they perceive the stock market as a barometer that measures the health of the economy? Why do they place such value on home ownership? Those are all parts of economic narratives. I want to study the narratives through time and across space. These ideas color people’s thinking and actions.


We  need to better understand the epidemics of popular narratives in order to fully understand fluctuations in the economy and in economic behavior.


One of the book’s key propositions is that economic events are substantially driven by contagious spread of oversimplified and easily transmitted variants of economic narratives. We need to incorporate the contagion of these narratives into economic theory. Otherwise, we’re overlooking a very important mechanism for economic change. We need to better understand the epidemics of popular narratives in order to fully understand fluctuations in the economy and in economic behavior.

Why haven’t economists traditionally considered popular narratives in developing theories and forecasts?

It’s difficult to quantify narratives because they are always changing and there are so many of them. We can’t go around listening in on people’s conversations to gauge a narrative’s effect. Digitized text and improved search engines allow us to search books, magazines, newspapers, business reports, legal briefs, personal diaries, sermons — all sorts of things — and get a sense of the popularity of specific terms. I did that while researching the book. At this point, the study of narratives involves computers and human judgment. You can’t just count the number of times a word is used. You have to look at how people are using the word. There are significant challenges to measuring narratives and incorporating them into economic theory, but I don’t think they are insurmountable.

One of the contemporary narratives you discuss involves the establishment of crypto-currency. What was the role of narrative in the rise of Bitcoin?

The crypto-currency narrative is intense. At its peak, Bitcoin reached a value of more than $326 billion. That’s big time. Why did it happen? Bitcoin was a dream in the eye of some computer scientist, and we don’t even know that person’s identity. It was supposedly an individual named Satoshi Nakamoto, but that has never been verified. We don’t even know if he exists. There’s an element of mystery to the narrative, which is important.

I think narrative is very important to the popularity of Bitcoin and other crypto-currency. Part of the reason that Bitcoin succeeded is that it fed into an anarchism narrative that government is unnecessary and untrustworthy. It fostered a narrative that young people have created a financial institution that is out of the government’s reach. That’s a powerful narrative. It strikes people as fun and exciting like any viral video does, although it isn’t a sign of the validity of Bitcoin’s core concepts. 

The mystery component is also very powerful. People like mystery stories. And mystery stories generate their own news, such as when people come forward claiming to be Satoshi Nakamoto. The legend of Satoshi Nakamoto may live on for a long time.

Aside from mystery, what other storytelling elements help narratives go viral?

Peter Brooks, Sterling Professor Emeritus of Comparative Literature at Yale, wrote a book called “Reading for the Plot” about the importance of narrative. I’ve discussed this with him. It’s difficult to describe what makes a successful narrative or novel or song. It’s somewhat random but it’s also has something to do with the creative spirit of writers. Sometimes we have no idea how a narrative originated. Other times they start accidentally or an old narrative returns to prominence. It’s hard to know what makes economic narratives stick just as it’s hard to predict when we’ll have a big influenza epidemic.

How does celebrity contribute to a narrative going viral?

Celebrity helps a lot. Some narratives don’t get started until a prominent person adopts them. One example I give in the book is “The only thing we have to fear is fear itself,” which Franklin Delano Roosevelt said of the Great Depression during his 1933 inaugural address. People had expressed this sentiment years before Roosevelt’s speech. For example, Yale professor Irving Fisher B.A. 1888, Ph.D. 1891, one of the leading economists of his day, wrote in 1930 about the danger of fear being communicated from the stock market to business.

Franklin Roosevelt delivers his first inaugural address in Washington, D.C.
“The only thing we have to fear is fear itself.” Franklin Roosevelt delivers his first inaugural address in Washington, D.C.

Another example is William Jennings Bryan’s famous “Cross of Gold” speech at the 1896 Democratic National Convention attacking the gold standard. A lot of people still know the speech’s stirring conclusion: “You shall not crucify mankind upon a cross of gold.”

Bryan didn’t write those lines. Congressman Samuel W. McCall used almost the same language in a speech he gave in January 1896 that is reprinted in the Congressional Record. It’s known that Bryan was present for McCall’s speech. He saw how that imagery could excite an audience. By using it in his convention speech, he gave it the authoritative stamp of celebrity, which helped it go viral.

How did narratives influence events during the Great Depression?

Roosevelt’s “nothing to fear” line touches on the important narrative that fear caused the Great Depression. That doesn’t tell you what caused the fear, and there were other narratives at play. In reading contemporary articles in newspapers and magazines from the Depression, I found another narrative that was very important: People called it “technological unemployment,” which meant machines replacing jobs. The narrative was that robots were taking people’s jobs at an unprecedented rate. This narrative was introduced before 1929 and it was amplified by the rising unemployment rate.

What sort of robot was taking people’s jobs in the 1930s?

The dial telephone is an example. It’s likely something that younger readers have never encountered. Early telephones had no numeric keypad or dial. You picked up the receiver and automatically spoke to the operator, who directed your call. A dial telephone was considered a robot in that it performed a job once done by a person. People believed that the unemployment rate would never decline because these machines were here to stay.

The book touches on a vast range of fields and topics, including psychology, history, epidemiology, literature, and a wide assortment of popular culture. How did you manage to pull together these varied fields, ideas, and information?

I can credit Yale. This is a cosmopolitan place that prizes the humanities and cross-disciplinary collaboration. The School of Management, where I have a joint appointment, has tried to integrate itself into the fabric of the university. We have had scholars here, including Irving Fisher, who were true Renaissance men and women. That is something that attracted me to Yale, and it is incredibly helpful when one wants to take a cross-disciplinary approach to a big question. 

Also, I read the biologist E.O. Wilson’s 1998 book “Consilience,” which advocates for staying connected with other fields of inquiry. I really believe in that.

Do any current economic narratives concern you?

I’m worried about the narrative that artificial intelligence (AI) will replace everyone’s jobs. It’s impossible to predict the effects of artificial intelligence on people’s livelihoods and future employment, but narratives around AI and machine learning really have the potential to cause economic booms and busts and drive public policy. The narrative hasn’t become toxic at this point. That might be because the United States is the global center for computer science, and we are basking in the reflected glory of the innovation that is happening here. The narrative could be taking hold in European countries with higher unemployment rates, especially in southern Europe. It could take hold in the United States, too, especially if some new advancement in AI comes out that is really impressive or unemployment starts to rise. If it catches on, the narrative could impact speculative markets like the real estate or stock markets. It’s something to keep an eye on.

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