April 14, 2023
Thanks to Alissa Simon, HMU Tutor, for today’s post.
In the book Narrative Economics: How Stories Go Viral and Drive Major Economic Events, Robert J. Shiller argues that viral historical events should be studied by economists. He defines narrative economics as the study of narratives which drive economic events. Humans rely upon narratives, memory, and emotion to make major decisions and these decisions move markets. Studying the narratives that drive human behavior will not enable prediction, but rather add data to our understanding of major events like stock market crashes or bank collapse. Therefore, Shiller wants students of economics to incorporate popular culture and historical narratives into their studies.
Shiller writes, “The lesson is that history, including economic history, is not the logically ordered sequence of events that is presented by subsequent narratives that try to make sense of it or try to achieve public consensus. Major things happen because of seemingly irrelevant mutations in narratives that have slightly higher contagion rates, slightly lower forgetting rates, or first-mover effects that give one set of competing narratives a head start. These random events can feed back into bigger and more pervasive narrative constellations.” His hypothesis stems from the study of epidemics in which the contagion rate moves faster than the wellness rate. In the case of narratives, then, a narrative infects a large number of people and sticks with them until it is replaced or forgotten. If the narrative is pervasive enough, then it has the potential to affect national, and perhaps global, markets. In other words, no one knows what events, trends, products, or conflicts might rise in the future, but it is worth studying how these have correlated in the past.
As one example, he offers the popularization of the Rubik’s Cube. Originally released in 1974 by Ernő Rubik, the cube gained its popularity in the early 1980s after being linked with the best-selling author Douglas Hofstadter and the rising popularity of science and math. Hofstadter’s book Gödel, Escher, Bach became a bestseller in 1980 and combined art, humanities, science, and math. Shiller explains, “His [Hofstadter’s] article presented Rubik’s Cube as representing deep scientific principles. He described connections to quantum mechanics and the rules for combining subatomic particles called quarks. Few people remember these details today, but they do remember that Rubik’s Cube is somehow impressive.” Hofstadter’s endorsement increased the perceived scientific and mathematical properties of the Rubik’s Cube, which increased its popularity in the 1980s.
Because economic markets are driven by human behavior, Shiller also looked at studies by neurologists. Their research confirms that humans preferred mode of communication is through story-telling. Chronological or elliptical, stories correspond to an internal narrative involving both memory and experience. Stemming from brain studies done in 1958 by William Penfield, Shiller adds that neuroscience has been influential in a number of disciplines. For example, media studies often incorporate story-telling as their primary mode of communication. Shiller would like to see more cross-disciplinary economic studies which aim at mapping viral trends.
Shiller labels narratives driven by fake news and marketing “engineered contagion.” They are successful, he says, because they feed on some basic human need and rely upon the fact that humans are not expert sleuths. He writes, “The construction of narratives by news media, promoters, and marketers can also help lower the forgetting rate. Narratives can be associated with symbols or rituals that remind people of basic elements of the narrative. A symbol can be incorporated into building architecture, letterheads, email messages, and a million other items, and a narrative can be incorporated into regular rituals, such as traditional parades on national holidays. Experts do not fully understand the role of ritual and symbols in aiding memory, but they do understand that they are associated with success…. All these examples illustrate a fundamental error that people tend to make: phools [a term coined by Shiller and coauthor George Akerlof] think that the popularity of a story or of a brand is evidence of its quality and deep importance, when in fact it rarely is.” Moreover, he says, humans enjoy fakery as much as reality. Trends of virtual reality and events like staged wrestling are as popular now as ever. Humans enjoy these events as forms of entertainment and willingly enter its world.
However, while humans are good consumers of entertainment, they are not good at separating fact from fiction. Shiller describes numerous fact-checking websites and then laments that, “Unfortunately, most people do not read these fact-checking websites. In addition, their credibility has recently been compromised by fake news designed to harm their reputations, leading some members of the general public to give up the hope of ever finding the real truth.”
In summary, Shiller asks that economists begin to study human narratives (a word they typically avoid) as a way to find the underlying reasons for market movement. He believes that stories are a single, vital foundation of the economy. His book is an exciting example of interdisciplinary research. He also delivers potential avenues for further research. Shiller concludes that narrative studies can only enhance our understanding of the economy, and for that reason alone, it is a worthwhile endeavor.
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