Robert J. Shiller - Narrative Economics: How Stories Go Viral and Drive Major Economic Events

When I was a nineteen-year-old undergraduate at the University of Michigan over a half century ago, my history professor, Shaw Livermore, assigned a short book by Frederick Lewis Allen, Only Yesterday: An Informal History of the 1920s, about the run-up to the 1929 stock market crash and the beginnings of the Great Depression of the 1930s. It was a best seller when it was published in 1931. After reading it, I came to believe that the book was extremely important, for it not only described the lively atmosphere and massive speculative booms of the Roaring Twenties but also illuminated the causes of the Great Depression, the biggest economic crisis ever to hit the world economy. It struck me that this periods history of rapid-fire contagious narratives somehow contributed to the changing spirit of the times. For example, Allen wrote an eyewitness account of the spread of narratives throughout 1929, just before the stock market peaked:

Across the dinner table one heard fantastic stories of sudden fortunes: a young banker had put every dollar of his small capital into Niles-Bement-Pond and now was fixed for life; a widow had been able to buy a large country house with her winnings in Kennecott. Thousands speculatedand won toowithout the slightest knowledge of the nature of the company upon whose fortunes they were relying, like the people who bought Seaboard Air Line under the impression that it was an aviation stock. [Seaboard Air Line was a railroad, so named in the nineteenth century, when air line meant the shortest conceivable path between two points.]

These narratives sound a bit fanciful, but they were repeated so often that they were hard to ignore. It couldnt have been so easy to get rich, and the most intelligent people in the 1920s must have realized that. But the opposing narrative, which would have pointed out the folly of get-rich-quick schemes, was apparently not very contagious.

After I read Allens book, it seemed to me that the trajectory of the stock market and the economy, as well as the onset of the Great Depression, must have been tied to the stories, misperceptions, and broader narratives of the period. But economists never took Allens book seriously, and the idea of narrative contagion never entered their mathematical models of the economy. Such contagion is the heart of narrative economics.

In todays parlance, stories of fabulously successful investors who were not experts in finance went viral. Like an epidemic, they spread from person to person, through word of mouth, at dinner parties and other gatherings, with help from telephone, radio, newspapers, and books. ProQuest News & Newspapers (proquest.com), which allows online search of newspaper articles and advertisements back to the 1700s, shows that the phrase go viral (and variations going viral, went viral, and gone viral) first appeared as an epidemic in newspapers only around 2009, typically in connection with stories about the Internet. The associated term viral marketing goes back only a little further, to 1991, as the name of a small company in Nagpur, India. Today, as a ProQuest search reveals, the phrase going viral itself has gone viral. Google Ngrams (books.google.com/ngrams), which allows users to search for words and phrases in books all the way back to the 1500s, shows a similar trajectory for go viral. Since 2009, trending now, a synonym for going viral, has also gone viral. These epidemics were helped along by the prominent statistics displayed on Internet sites about numbers of views or likes. Both going viral and trending now characterize the rising part of the infectives curve, when the epidemic is growing. There isnt as much popular attention to the process of forgetting, the later falling part of the infectives curve, though for economic narratives that will likely be as important a cause of changes in economic behavior.

Allen was thinking in terms of stories going viral when he wrote his book, though he did not use the term. He wrote about his emphasis upon the changing state of the public mind and upon the sometimes trivial happenings with which it was preoccupied, but he did not formalize his thinking about the contagion of narratives.

We need to incorporate the contagion of narratives into economic theory. Otherwise, we remain blind to a very real, very palpable, very important mechanism for economic change, as well as a crucial element for economic forecasting. If we do not understand the epidemics of popular narratives, we do not fully understand changes in the economy and in economic behavior. There is an extensive medical literature on forecasting disease epidemics. This literature shows that understanding the nature of epidemics and their relation to contagion factors can help us forecast better than those using purely statistical methods can.