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By Mehdi Farooq 29-01-2020
In: deep-dives | Economics

Using Narrative Economics To Better Understand Markets

(6 min read)
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Economics lags other social sciences, such as history, anthropology, and sociology, in understanding the ways narratives (stories) affect human actions. In his paper and book “Narrative Economics”, Nobel laureate Robert J. Shiller describes how economic events ranging from the Great Depression to the Bitcoin craze can be explained by narratives and not just economic data.




What is Narrative Economics and Why Study it?

Put simply – it is a study of how popular stories and theories begin, spread evolve and live on. It also involves how these stories alter people's economic decision making. It drives major economic events like recessions or asset price bubbles through collective behavior.

At the micro level, individuals are constantly making decisions. These could include: should I consume now or wait for growth to pick up? Should I hire additional workers? Should I Invest in Bitcoins? And rather than using economic data and analyzing data to make these decisions, people discuss ideas, gossip and share stories. Therefore, storytelling is central to human actions. Economists have overlooked the power of narratives relative to other social sciences. In fact, economics and finance are the worse fields for incorporating narrative (Figure 1).
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