As we’ve gone through a brief history of Game Theory and Behavioral Finance (with the discussion culminating in Prospect Theory), our exploration now takes a turn toward the realms of information theory and narrative economics. As we shift from Behavioral Finance to Behavioral Economics, the main branch of study under which Behavioral Finance is classified, we focus on combining the elements of economics and psychology to study how we do things in the “real” world. Narrative economics, first introduced by Robert J. Shiller in his 2017 book entitled “Narrative Economics: How Stories Go Viral and Drive Major Economic Events,” unveils the impactful role of stories in shaping economic decisions.
Shiller’s narrative economics sheds light not only a diagnostic tool but also a way to rationalize what future economic events may be. However, its predictiveness is built on the quality of information at hand and the researcher’s unique ability to unravel it.
Using the Great Depression as his example, Shiller delved into the troves of historical narratives—journals, news clippings, novels, and sermons—unraveling the complex accumulation of thoughts leading up to the crash. The stories surrounding the Great Depression centered on key global events: the aftermath of World War I, the impact of the Spanish Flu, and a myriad of societal issues (suffrage, prohibition, etc.). Through the mixture of narratives, Shiller deciphered the moral undercurrents and societal judgments that framed the post-crash tales as a reckoning for the 1920s.
Narrative economics also allowed him to retroactively analyze the narratives preceding economic events, laying bare the intricate stories that wove their influence. Beyond the hindsight gaze, narrative economics has the potential to be used as a crystal ball, revealing its predictiveness. Shiller uncovered that, from the mid-1920s onward, narratives from those in power prophesied an economic downturn, a foretelling that took years to materialize. The Crash of 1929, initially seen as a vindication of those predicting societal reform, turned into a self-fulfilling prophecy. Shiller’s historical narrative voyage showcases how narrative economics, as a predictive tool, offers a unique lens for foreseeing and comprehending economic shifts.
A tangible application emerges in the reimagining of data mining strategies. Traditional approaches, anchored in the most frequently used phrases, may gloss over the rich nuances embedded in narratives. Shiller’s insights caution against assuming universal meanings in online discourse, urging a more nuanced approach that accounts for regional and ethnic variations in language usage, like listening to podcasts. This refined data mining technique becomes pivotal for a more authentic understanding of the diverse narratives that sway decision-making.
As part of the narrative gathering expedition, Shiller’s narrative economics calls for a refinement in data mining methodology, especially when the aim is prediction. Understanding regional and ethnic differences in online language usage becomes the key. While certain phrases might dominate the stage, their meanings can differ across different communities or even some individuals in those communities. Shiller’s approach challenges market researchers to dive deep into the contextual twists and turns of language, ensuring that data mining doesn’t simplify the intricate narratives influencing decision-making.
Narrative economics also calls for a careful redesigning of experiments, prompting a shift in the opening scenes. Oftentimes researchers will be plagued with the problem of too much material and so little time to process all that information, especially at the rate stories are being told today. Shiller’s emphasis on starting from the right place—unveiling the backstories and contextual narratives—suggests that the initial framing of discussions significantly impacts the depth of insights gained and hinges on a storytelling framework. Using storytelling as an initial exercise not only serves as a self-diagnostic ethnography tool, aiding participants in gaining a deeper understanding of their behavior, but also enhances the market researcher’s insights into effective communication strategies.
In essence, narrative economics unravels as a multi-faceted storyteller’s toolkit for market researchers, offering insights into historical sagas, shaping data mining techniques/methodologies, and redefining the dynamics of research sessions. By embracing the power of narratives, market researchers can waltz through a more nuanced understanding of decision-making processes, pirouetting through the diverse landscapes of economic behavior and possibly breaking through into how those stories not only add up to the event we all see but can be broken down into information blocks to see how it moved its observers and vice versa.