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Robert Shiller, a leading economist and Nobel Laureate, introduces his incoming book and suggests that the worst field in the Social Sciences for incorporating narrative is Finance. According to Shiller, narratives are popular stories that affect individual and collective economic behaviour. They can spread across geographies and mutate over time, much like a contagious disease. Shiller believes that because of this, they can be quantified via epidemiology models. He gave the rise of Bitcoin as an example of a narrative, which he believes became popular purely due to the appeal and quality of its story. He believes it reignited an older anarchist narrative, where there is resentment for government and how people can function without them.
Why does this matter? Through the power of the self-fulfilling prophecy, viral narratives can hurt the economy. There are plenty of examples: the Laffer’s tax curve (which was invented in a restaurant) was widely used to form policy but turned out to be unfounded. Also, prior to the 1970s yield curve inversion was hardly spoken about, but every time it happened, a recession followed. This then led to an increase in the popularity of this indicator and it became a part the FED toolkit. Similarly, the surge in Oil prices this week after an attack on a Saudi crude facility can be attributed not just to how this creates supply scarcity but also how it evokes narratives of geopolitical risk. There’s much to be gained from Shiller’s work, and you can read more in this in-depth interview of the author.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)