Book SummaryNarrative Economics, by Robert J. Shiller

1-Page Summary1-Page Book Summary of Narrative Economics

In Narrative Economics, economist Robert J. Shiller explores economic narratives—the stories that people construct to make sense of economic events and behaviors. These stories include both the explanations we give for why certain economic events occur and the meanings and interpretations we assign to those events.

Shiller notes that in economics, where numbers and statistics often take center stage, we often overlook the influence of narratives and popular ideas. While quantitative data provides valuable insights, it’s equally essential to understand the ways in which economic narratives shape our perceptions of the world. After all, economic events—from bubbles to stock market crashes, recessions, depressions, and panics—are not natural phenomena like weather patterns or the movement of the planets. Instead, they’re the product of human beliefs and the actions that humans take as a result of those beliefs.

According to Shiller, narratives play a crucial role in our understanding of economic events, as they weave together observations into coherent stories that reflect our values. This narrative-driven perspective is deeply rooted in human nature, as research suggests that our brains are hardwired to respond to stories, analogies, and metaphors. Therefore, it’s imperative to explore how and why certain economic narratives emerge, how they come to be accepted, how they influence events, and how they inform our interpretation of subsequent events. Once economists have this understanding, they can better predict future economic events like recessions and stock market crashes and craft more...

Narrative Economics Summary Part 1: The Power of Narrative

Shiller writes that narratives are extraordinarily powerful because they help us make sense of the world. By organizing random events and observations into stories with clear narrative arcs, we come to understand our world, how it came to be, and our place within it.

Shiller points out that we create similar narratives to describe the natural world. As winter approaches in temperate climates, we observe that the trees shed their leaves, many plants go dormant, the landscape becomes barren, and temperatures drop. Based on these observations, we form a narrative that describes winter as a period of rest and reflection for nature. It's a time when the Earth appears asleep, conserving energy and resources. This narrative directly impacts our beliefs and behavior—we mirror nature’s resting period, leading to cultural traditions like winter holidays and celebrations that emphasize coziness, reflection, and the expectation of renewal in the future.

(Shortform note: Some authors have written that myths are the foundation of all human physical and intellectual pursuits, be they religious, economic, social, or cultural, because these myths tell us who we are and what destinies we’re...

Narrative Economics Summary Part 2: Factors That Facilitate Narrative Spread

Now that we’ve explored what economic narratives are and why they’re so powerful, it’s important to understand how people come to accept them. In this section, we’ll examine some of the factors that, according to Shiller, contribute to the widespread dissemination of economic narratives: memorable visuals, emotional resonance, influential endorsers, holistic explanations, and a human-centric focus.

Factor #1: Memorable Visuals

Shiller writes that narratives that incorporate easily understandable visual elements gain traction more rapidly. This is because visuals have the power to simplify complex concepts and make them more accessible to a wider audience. Human cognition is inherently inclined towards visual processing, and people tend to grasp visual information more quickly and effectively than text or abstract data.

For example, in the realm of sustainable investing, the narrative of “green bonds” has gained traction in recent years. Green bonds are financial instruments designed to fund environmentally friendly projects such as renewable energy installations, clean transportation, and energy-efficient building projects. What sets green bonds apart is the...

Narrative Economics Summary Part 3: Recurring Economic Narratives

With our understanding of the power and reach of economic narratives and the factors that facilitate their spread, we can now turn our attention to exploring some of the specific economic narratives that Shiller argues have recurred throughout American history.

These narratives tap into fundamental themes that have shaped our collective understanding of past economic events. Because of the staying power and communicability of these narratives of the past, they influenced how people perceived and reacted to subsequent economic events. This, in turn, means that the narratives themselves come to have a profound influence on future events.

Recurring Narrative #1: Financial Panics and Depressions

Shiller observes that the narratives surrounding what we now refer to as “recessions” or “depressions” have evolved over time.

In the 19th century and early 20th century, these economic downturns were labeled as "panics," and the narrative that prevailed was one of fear and loss of confidence. This belief in a narrative of panic shaped what ordinary people and elected leaders saw as the appropriate response. They believed that only great figures, like financier J.P. Morgan,...

Narrative Economics Summary Part 4: Predicting Tomorrow’s Narratives

Having explored what factors make certain economic narratives “stick” and which economic narratives have had staying power throughout history, Shiller writes that we need to develop tools that help us predict and prepare for the narratives that will take hold in the future. Given the real economic power that narratives hold, it is essential to understand their origins, propagation, and eventual decline. Shiller recommends that economists do this by embracing qualitative (in addition to quantitative) research and by looking for new sources of narratives in traditionally overlooked places.

Shifting to Qualitative Research

Shiller writes that economists must venture beyond their traditional quantitative approaches and pay heed to the emotions and impulses that shape the decisions of the real people who constitute the economy. This shift calls for a more nuanced and multidisciplinary approach.

To gain a deeper understanding of how narratives influence economic behavior, economists should engage in qualitative research methods. This includes conducting interviews with individuals, organizing focus groups, and undertaking longitudinal studies to measure how attitudes and...

Shortform Exercise: Explore Economic Narratives

Use these exercises to understand the narratives and stories that drive your economic beliefs and behaviors.

What is an economic narrative, story, or belief that you accept? Why do you believe this to be true, and how does it influence your economic decision-making? For example, you may believe that AI will make most jobs obsolete, so you spend extra time familiarizing yourself with large language models like ChatGPT.