When stories drive economies

It was the classic David vs. Goliath story. A bunch of renegade small time retail traders that got together and took on Wall Street’s big boys, giving the short-sellers a bloody nose. As this story broke, more and more traders got in on the action and joined the bandwagon.

A couple of posts on reddit and you got yourself a herd stampeding on the stock market. Reddit’s Wallstreetbets led to wild gyrations, significantly pushing the share value of stocks such as GameStop upwards. It demonstrated the power of individuals coming together in a group. But what’s the glue that binds these people together?

It’s all about the story

A convincing story. Stories are what brings random people together in a common belief. According to the renowned historian and bestselling author Yuval Harari,

“Homo sapiens conquered this planet thanks above all to the unique human ability to create and spread fictions. We are the only mammals that can cooperate with numerous strangers because only we can invent fictional stories, spread them around, and convince millions of others to believe in them.”

Narrative Economics

Stories can shape reality. They can drive economies. That’s what Nobel Prize-winning economist Robert Shiller’s latest book Narrative Economics — How Stories Go Viral & Drive Major Economic Events is all about. Published back in 2019, Shiller’s book explains how stories people tell — ranging from housing booms, Bitcoin, or gold — affect economic outcomes. In essence, his book is an urgent appeal to look beyond market fundamentals, statistics and hard economic theories, and pay more attention to how narratives drive economies.

Contemporary economics has failed, in his opinion, to adequately take the power of narratives into account. “Though modern economists tend to be very attentive to causality, as a general rule they do not attach any causal significance to the invention of new narratives”, he notes. Only by including an analysis on economic narratives can we fully understand economic events and phenomenon. And this actually works also vice-versa, he points out, writing that “new contagious narratives cause economic events, and economic events cause changed narratives.”