To study narrative is to examine ourselves. We think in story, process our world through the lens of story, and use storytelling to communicate ideas. One prominent economist believes that stories are the heart of human behavior. He says to understand the power of narrative is to understand financial booms and busts — and to prevent crises from getting worse.
Robert Shiller is a Nobel prize-winning economist at Yale. He’s written books and papers warning of bubbles in the stock and housing markets before they happened. This week at the World Economic Forum in Davos, Shiller banged the drum on a topic that’s near to my heart — the power of narrative to drive human behavior. Shiller didn’t mince words. “Most people think in narratives, but economists are terrible with narrative,” he said. In a follow-up interview on CNBC, Shiller said, “Last year I chastised the [economics] profession for neglecting what you media people know. Narratives drive human behavior.”
Shiller was referring to an address he delivered last year at the 129th annual meeting of the American Economic Association. In the speech, Shiller makes a surprising connection between the study of epidemiology and economics, an association he wrote about in his 2009 book Animal Spirits.
“The human brain has always been highly tuned towards narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing,” Shiller said in his speech. “Narratives ‘go viral’ and spread far, even worldwide, with economic impact.” Shiller says that the same epidemic models that trace how disease or viruses spread can be used to describe the word-of-mouth transmission of an idea. Stories spread ideas like a contagion—infecting one person and another, and another. Some ideas, of course, are great ones and should catch on. But some stories—once they go viral—can have a damaging impact on world economies.
The Narrative That Fed The Great Depression
For example, Shiller says viral narratives extended the depth of the Great Depression in the 1930s. On the first Sunday after the stock market crash of October, 1929, preachers used their sermons to attribute the market decline to the “moral and spiritual excesses” of the 1920s. The sermons were featured in the Monday newspapers. “The macro storyline in the Great Depression gradually morphed into a national revulsion against the excesses and pathological confidence of the Roaring Twenties.” As people dramatically reduced their spending, businesses failed and bread lines formed. Each individual story fed the fear. “Contagion rates for stories of business failures, rather than inspirational stories, were naturally high at a time when a large fraction of the population was unemployed. Stories abounded of business people committing suicide,” according to Shiller.
Stories continue to impact our economies today. Shiller says the financial crisis of 2007-2009 also followed “a narrative-based chronology.” Financial busts are “driven by a cadence of stories.” Stock market and housing bubbles are formed when people hear stories of easy money being made. Panics make declines worse as stories of losses go viral.
Another narrative that Shiller and several other economists brought up in their panel at Davos is today’s prevailing storyline that humans will be replaced by machines. Perhaps it’s caused you some anxiety lately as you read stories about people losing their jobs to automation. It might help to know that this narrative really kicked in with the Luddites in 1811 (an article in Smithsonian Magazine tells a good story about the 19thcentury rebellion against automation). According to Shiller, the narrative has replayed itself every 15 years or so. The problem with the narrative that machines will replace humans, of course, is that it always ends with more jobs being created than were eliminated.
Narratives Capture The Imagination
The study of narrative carries profound implications for leaders of countries and companies.
A big theme running throughout Davos this year was which narrative would win out—populism or globalization. Interestingly, this report in the Irish Times calls attention to the metaphors used in the rhetoric heard among leaders debating the issue. Leaders are using the building blocks of story to make their case. Shiller argues that economists failed to predict populist actions like Brexit precisely because they don’t take into account how narratives influence behavior. “We will never really understand important economic events unless we confront the fact that their causes are largely mental in nature,” Shiller wrote in Animal Spirits. While economists stick to quantitative facts and models, Shiller says “The confidence of a nation—or any large group—tends to revolve around stories.”
Successful narratives capture the imagination, says Shiller. As a leader you might not like the prevailing story that’s taking hold in your country, company or industry. If you understand the psychological forces that underlie people’s behavior, you’ll stand a much better chance of offering a successful counter-narrative.