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Tales of the Economy

While economic textbooks have long relied on a utility-maximization model of economic decision-making, Robert J. Shiller and other behavioral economists continue to demonstrate that human behavior is not so simple. The stories we use to frame our thinking and guide our actions might not always make sense, but they play a crucial role nonetheless.

LONDON – Robert J. Shiller needs no introduction. Having made fundamental contributions to finance theory and behavioral economics, he was awarded the Nobel Memorial Prize in Economic Sciences in 2013. In his new book, he pushes his interest in behavioral economics in new directions, highlighting the role of economic narratives in individual decision-making, macroeconomic fluctuations, boom-and-bust cycles, and financial crises. At the core of the book is the argument that one cannot understand individual decision-making and how it departs from the textbook utility-maximization model – much less its aggregate economic and financial consequences – without considering “economic narratives.”

A narrative, as Shiller defines it, is a story with a moral – that is to say, a story that packages a set of values with implications for how individuals should act. A narrative rises to the level of an economic narrative – or, more precisely, a macroeconomic narrative – when it is widely embraced. That widespread acceptance leads in turn to a common behavioral response according to the narrative’s “script” – the sequence of actions that people think they should pursue for no better reason than that they understand that others are doing the same.

Consider, for example, the key narratives of the euro crisis. In northern Europe, the dominant narrative focused on southern eurozone countries’ long histories of profligacy and fiscal laxity, traits sometimes attributed to the region’s Mediterranean climate. This description was then juxtaposed against northern Europeans’ own prudence and thrift – characteristics supposedly derived from searing memories of hyperinflation after World Wars I and II.

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