The ‘Narrative Economics’ Playing Out Now

Center for Financial Policy Hosts Nobel Laureate in Global Webinar

“Stories abound in life,” Maryland Smith’s Russell Wermers said, opening a webinar discussion Tuesday. The topic: Narrative economics, with Nobel laureate Robert Shiller.

Shiller, who received the 2013 Nobel Memorial Prize in Economic Sciences, has recently written a book “Narrative Economics: How Stories Go Viral and Drive Major Economic Events,” about stories and how they affect the way people think.

It’s a “fascinating read,” said Wermers, the Bank of America Professor of Finance and director of the Center for Financial Policy at the University of Maryland’s Robert H. Smith School of Business. “We like narratives. We like somebody to tell us: what is the moral of the story? Where are we going?”

During a webinar hosted by UBS and the Center for Financial Policy, Shiller described the narrative stories all around us, impacting our economics and our everyday lives.

In economics and in finance, researchers tend to think in data and in accepted research methods, rather than in stories. Papers published in finance journals and economics journals rarely contain the word “narrative.” Papers published in psychology, sociology, marketing, journalism and history, meanwhile, frequently do. “We need to look at the insights we can gain from other fields,” said Shiller, speaking to the global audience of about 700 invited guests.

Narratives guide our thinking, he said. “People think in terms of stories, more than diagrams or equations. When you dream at night, you dream a human interest story. It has a plot – it may be kind of a garbled plot, but it is a plot.”

With improved, digitized, searchable datasets of social media, books, magazines, newspapers and legal briefs, finding narratives is easier than ever.

“The assumption that people are rational, which is standard in economics, is a good assumption for many purposes, but we have to move beyond that if we want to forecast – really forecast – and recognize that people’s thinking changes through time.”

He offered several examples, some of them from today’s headlines, and some much older.

The COVID-19 pandemic: “To some extent, I think that COVID-19 is a narrative epidemic. We talk about it so much, and it changes all of our thinking,” Shiller said. Like all epidemics, the new coronavirus has shown to have a narrative epidemic curve, one that has risen to a peak as contagion exceeded recovery or death, and then began to decline gradually as recovery rates outpaced new cases. That’s where the eastern United States stands now, on that downward slope. “But we still have to be careful,” Shiller warns. How the slope proceeds from here isn’t known.

He noted that the Center for Infectious Disease Research and Policy has long-run forecasts that show three possible scenarios – a “peaks and valleys” scenario that sees new cases and new deaths rise and fall over an extended period of time, a “fall peak” scenario that sees a surging outbreak that dwarfs what’s already been seen in the U.S., or a “slow burn” scenario that shows cases continuing at roughly the current rate until 2022.

Epidemiologists caution that the slope will only continue its downward trajectory as long as people take precautions – staying home, practicing social distancing and wearing masks in all public places. Whether they do, Shiller says, may depend on the narrative they hear. “These things will depend on human behavior, and human behavior is hard to predict,” Shiller said.

The death of George Floyd: “That narrative, which is represented by a video, and it’s also transmitted by speech, has become a pandemic of its own, and of an entirely different kind. Why is it that this happened?” Shiller asks. The video, he said, poignantly illustrated a fact that many already knew, about police brutality and its disproportionate impact on black men and women, and through narrative forced people to pay closer attention to it, to stand up and demand change. “This video did that,” he said, describing the content of the video as “awful,” “horrible,” “evil” and “scary.”

“What is new or different about this? It’s something about the way it was done. There have been other videos where you don’t see the faces. You don’t see the smug look on this man’s face, his total indifference to what is happening, all of these things render human emotions, and make things contagious,” he said, noting how the video was widely shared and prompted outcry around the world. “I hope this has a good outcome, I hope this has an outcome where we have improved our police departments and sorted out better methods of dealing in situations.”

The Stock Market Rally: Stocks have broadly been gaining since March 23, when the S&P 500 hit what appears now to be a bottom after sharply falling as governments shut down businesses and economic activity to try to curb the spread of the coronavirus pandemic. Even as health authorities warn of the risks of reopening businesses too soon and caution about the risks of a surge in new COVID-19 cases that far exceed the previous surge, stocks have continued to rise. Shiller said he doesn’t yet understand the narrative that’s driving the stock rally.

“Narratives are difficult to study, just as viruses are difficult to study, because they keep mutating and changing,” he said.

He noted however, that the personal savings rate – the percentage of one’s income that is saved – has climbed as consumers, stuck in their homes, have limited discretionary spending. “What would happen if everybody becomes fearful about a COVID epidemic next fall that will shut down even more of the economy, and be even worse? What would that do to the stock market?”

Paradoxically, he answered, it might drive the markets up, rather than driving it down, as people become motivated to save even more of their income, and turn to equities to do so.

“Or it might be that people are just hearing stories about a potential COVID-19 vaccine, and are looking to stocks,” he said. “Because people want to believe those stories.”

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