Narrative Economics

Robert Shiller has spent his career studying the gap between prices and fundamentals. His work on stock and housing valuations won him a share of the 2013 Nobel Prize, and Irrational Exuberance warned about both the dot-com and housing bubbles. Here he argues that economists track interest rates and inventories but ignore the contagious stories that change how people spend, save and invest, even though those stories often drive recessions and booms.

He treats economic narratives the way epidemiologists treat disease, with contagion and recovery rates, and tracks their rise and fall by counting words and phrases in digitized newspapers and books. His examples range from Bitcoin to the Laffer curve.

Kirkus called it wonky but of great value to economists and policymakers, Martin Wolf in the FT called Shiller one of the world's most original economists, and Science's reviewer found his many examples convincing. Shiller presents the book as the foundation for a new field rather than a finished forecasting model, and readers should take it that way.

It is a natural follow-up for readers of Irrational Exuberance and Animal Spirits, and useful for any strategist trying to understand why markets react to ideas before data.

1. Stories move markets. Whether a narrative is true often matters less than whether it is spreading. Watch what people are telling each other, not just what the data say.
2. Narratives behave like epidemics. They have contagion and decay rates, so the timing of a peak in attention can matter as much as the content.
3. Old stories return in new clothes. Fears about automation, faith in property prices and talk of new eras keep coming back. Recognizing a familiar story helps you judge how far it can run.
4. Belief can create value. Assets like Bitcoin get much of their price from a shared story. Valuing them means judging how long that story will hold.
5. How a warning is framed matters. Forecasts and policy statements become narratives themselves. Officials and strategists need to alert people without setting off the panic they are warning about.

Shiller opens with the Bitcoin story and builds from method and evidence to a tour of the recurring stories that shape economic life. The book has four parts and an appendix.

1. The beginnings of narrative economics (chapters 1-6). Using Bitcoin as a test case, Shiller shows how a story about technology, rebellion and getting rich can create value. He argues for consilience with history, psychology and epidemiology, explains contagion and why some narratives go viral, and follows the Laffer curve's spread from a napkin sketch.
2. The foundations (chapters 7-8). He takes up how narratives can cause economic events rather than just reflect them, and sets out seven propositions about how they behave, including that they mutate, recur and matter whether or not they are true.
3. Perennial economic narratives (chapters 9-18). The longest part follows nine stories that keep coming back: panic versus confidence, frugality versus conspicuous consumption, the gold standard versus bimetallism, labor-saving machines replacing many jobs, automation and AI replacing almost all jobs, real estate booms and busts, stock market bubbles, boycotts and profiteers, and the wage-price spiral blamed on unions. He tracks each with word counts from digitized newspapers and books.
4. Advancing narrative economics (chapter 19). Shiller urges economists, central bankers and forecasters to collect and study narratives systematically. An appendix shows how epidemic models apply to economic stories.

From Nobel Prize–winning economist and New York Times bestselling author Robert Shiller, a groundbreaking account of how stories help drive economic events—and why financial panics can spread like epidemic viruses In a world in which internet troll farms attempt to influence foreign elections, can we afford to ignore the power of viral stories to affect economies? In this groundbreaking book, Nobel Prize–winning economist and New York Times bestselling author Robert Shiller offers a new way to think about the economy and economic change. Using a rich array of historical examples and data, Shiller argues that studying popular stories that affect individual and collective economic behavior—what he calls narrative economics—has the potential to vastly improve our ability to predict, prepare for, and lessen the damage of financial crises, recessions, depressions, and other major economic events. Spread through the public in the form of popular stories, ideas can go viral and move markets—whether it's the belief that tech stocks can only go up, that housing prices never fall, or that some firms are too big to fail. Whether true or false, stories like these—transmitted by word of mouth, by the news media, and increasingly by social media—drive the economy by driving our decisions about how and where to invest, how much to spend and save, and more. But despite the obvious importance of such stories, most economists have paid little attention to them. Narrative Economics sets out to change that by laying the foundation for a way of understanding how stories help propel economic events that have had led to war, mass unemployment, and increased inequality. The stories people tell—about economic confidence or panic, housing booms, the American dream, or Bitcoin—affect economic outcomes. Narrative Economics explains how we can begin to take these stories seriously. It may be Robert Shiller's most important book to date.