Robert Shiller Discusses Narrative Economics

I could babble for all this time about how fascinating it was to chat with him, But rather than me do that, let me just say, with no further ado, my conversation with Professor Robert Schiller. This is Master's in Business with Barry Ridholts on Bloomberg Radio. My extra special guest this week is Robert Schiller. He is a professor

of economics at Yale University. He won the Nobel Prize for his empirical analysis of asset prices in He is perhaps best known for the cyclically adjusted pe ratio, the Case Shiller Housing Index, all sorts of works in behavioral economics as well as the author of numerous books, most recently Narrative Economics, How stories go viral and drive major economic events. Bob Schiller, Welcome to Bloomberg. Very it's a pleasure.

So it's funny that you, of all people, wrote this book when when I think of narratives in the context of behavioral economics, I tend to think of the stories that investors tell themselves to either rationalize buying a company or not selling something that didn't work out. And you seem to have taken this to a different direct. Your thesis is narratives has a very big impact on markets and the economy. Is that different from your prior work

or is this consistent? I wrote a book in two thousand called Irrational Exuberance, which focused on well, I didn't use the word narrative a lot, but it was the effect of narratives on the stock market. I've decided it's bigger than that. It extends to the whole economy, and a lot of people know about the importance of narratives,

but economists mostly don't. So it's it's trying to bring the study of narratives into economics because I think it matters for the big events that we we see And in the book you describe how other fields use narratives pretty robustly as a way of either explaining what happened or why something happened. Why why has economics been so behind the times with this, Well, I don't exactly know

why it is so different. It has something to do with a a spree decor and a department of economics and finance that is built around this maximizing framework that that people we don't describe their behavior, we describe their objectives and assume that they're maximizing. They're expected success with these objectives. And there's a reason for that in economics that often people know something that we uh that that is guiding their actions, and we better figure out what

that is. And so I think there's that is an interesting direction that economics has taken. And uh it leads us to things like the optimality of market solutions. UH. And so it's become it's great, but it's also become something of a religion. UH. And it has blocked people seeing the obvious. So homo economists people being profit maximizers. I assume you're not really a big believer that that is the dominant narrative all the time. It's not the

dominant narrative all the time. And human mind is very capricious, and it jumps from narrative to narrative, and it's socially determined. It's not just narratives I tell myself. It's important that I tell them to others and they can spread virally. So that leads to the question about social media. How important is the modern era of fill in the blank, Facebook, Twitter, Instagram,

whatever to economic and market stories going viral? Well, it changes this the scenario, but we did have stories going viral thousands of years ago through word of mouth, the same way viruses go viral from person to person with no intermediary. That's how you catch a disease. Usually you meet someone and it spreads from one person to another. So it's capable of producing big epidemics. Now it might

beat them up. It also allows more polarity. It allows people to find similarly oriented people and so you might see more diversity and views that come about because of So I think we have to study the effect of social media and other internet programs. But fundamentally, narratives have been important in driving the economy. Going back Middllennia. All right, so let's talk about some big events, and I want to get your feedback as to how various memes impacted them.

There seem to have been a number of narratives around the Great Recession and the credit crisis. The one that I remember distinctly home prices never go down. It turned out not to be the case. How important were narrative economics to the build up to the crisis as well as the subsequent collapse. I think home prices that was a major cause of the crisis, but we might have still had a recession, but it wouldn't have been so

bad without that. I want to know what I'm interested in the big events, and often it's contributing factors that make them big. So the idea that homes are a great investment, it wasn't so much that people were saying home prices never go down. It's that they didn't pay any attention to the thought that they might go down.

I remember I was on stage and in a event around two thousand five, two thousand six, and I asked a businessman who was on the panel with me, what if home piss go down in front of an audience and He seemed perplexed. But what are you talking about. It's not like he was just saying that they never go down. But he said they have. They've never gone down, not since of the Great Depression. And I said, well, what if that happens again? And he was kind of

making me look crazy. He couldn't even conceive of the idea that prices might fall. Well, when you haven't seen them fall substantially since the Great Depression, maybe that's forgivable. It didn't. We see a decrease in prices late late eighties after the eighties seven crash, and rates had gone up. So it's not like it's two generations ago. It was thirty years ago. If you're a fifty something, you're a business person, that should be in Europe. But it's not

in the narrative. It's not being talked about. We can forget things like, for example, the stock market crash of seven. That's a little over thirty years ago. But my students don't know anything but never heard of it. What about the dot com crash or the O eight oh nine collapse. It's got to be a little fresh now. Yeah, well, the dot com crash was in the future, in the event that I'm describing. But people know about things that are that are popular, and the crash is the one

that everyone remembers. Other ones more recently, how about the six crash or yeah, well it was like one day there was a six percent drop. Nobody remembers. I mean maybe you remember. I don't remember that. That's before my time. So let's talk about another big event. Let's let's talk about the gold standard. The US for a long time was on the gold standard, then we were off. President Trump has talked about going back to the gold standard. This seems to rise and fall over time. What what

drives that? Well? I think that what drives narratives is a certain creativity that some people have at some moments in their lives to invent a story. Uh. And this is something that literature department studied economists don't What is it? What is it about a story that works? Uh? You know, often are I think our attention to ideas is focused

by the kind of stories that accompany them. Um So I thought, for example, and it it there's something about visual impact, imagery, something about human interest, something about emotions being driven up, uh, something about tie into other stories that you already liked uh that the creative art of a writer can sometimes surmount and and use and create a narrative that will really go viral. It's a difficult thing to do. It's it's similar with music. Some music

goes viral and some doesn't. I think it's it's somewhat random. Something gets started and it becomes developed certain associations, and then everyone is talking about It has to be right time, right place, and just a little bit of luck, uh, and maybe requires perfection. So the most the most famous listen in the arts, where it's not exactly is sort of there. The ballet the Nutcracker. That's the most famous

ballet in the entire world. It's it's everywhere. But when Tchaikovsky first wrote it in it wasn't a big success. He had to work at it, uh. And then um, it came over to the US and George Ballantine, the ballet writer, the ballet director, fixed it, made it into a really beautiful ballet, and so it has now gone viral and it's we love this ballet. People who don't like ballet will go to that one and repeatedly. So so there was something about it that that Tchaikovsky had

an idea. He couldn't quite get it at first, and it involved little details that make it somehow work eventually be bringing the children. You have to emphasize the children, and people love to see children blossoming on stage in front of them. So because it's a Christmas themes and it's also ties into anything else, and that there's an annual prompt to do it, to see it again, so a lot of people go every Christmas. Now this isn't

really an economic narrative. I'm doing a little bit different, but it's the same idea that there that the and what's so special about that story or any other story? Something clicked in and it's just universal. Sorry, by the way, have you seen the nutcra I recommend you go see

it if you haven't. Them. The story you're telling about how that when viral reminds me a little bit of Derrick Thompson writes for The Atlantic and wrote a book How HiT's Happened, and he talks about a number of paintings,

including all of the Impressionists. It's really a sort of fascinating coincidence how a certain group of Impressionists became worldwide famous because one of them were collecting other Impressionists work, left it in their estate to the French Um, one of the French museums, and part of the will was it how to be displayed. So suddenly just a group of a new style of art that wasn't popular anywhere else, and a group of seven or eight artists became worldwide famous.

Same sort of thing, very serendipitous, very random. This reminds me of a book that influenced me a lot years ago. It's called The Painted Word by Thomas Wolfe. It's a similar theme. He claims that a lot of modern art is not the quality of it isn't recognizable just by looking at it. You have to read the reviewers, the critics, and they will tell weave it into a story. Then when you go back and look at it, you love

this painting. The story wouldn't have known. Quite interesting. Let's talk a little bit about the world of economics and some of the things that either do or don't go viral. In the book, you write about the Laugher curve, which I've always thought of as having an element of truth, that there has to be some optimal tax rate that maximizes revenues. But the way it seems to have been applied. Is let's just call it contraindicate did It was a disaster in Kansas. It had terrible effects. So so why

did the Laugher curve go viral? And why are people so willing to overlook some of the downsides of it? Well, I have only a partial understanding why it went viral. I compare it with the Rubik's cube, which went viral at the same time in the book during Reagan sterm Right, and so why did Rubik's cube go viral? It's just a puzzle, right, and it was it was the right story was told about it. Huh, and that was thought

to be um, somehow deep and important. An obscure mathematician had created this uh engineer, right, and that's a narrative, just those two words Hungarian engineer at the time when we were still had Eastern blocked countries behind the iron curtain. Right, so all these things, Uh, it may not work again today. Hungary has a different story about it now. But I mean the laughter curve also, there's a little story associated

with it. It's the story of art Laugher and economist at dinner at the Two Continents restaurant in Washington fancy restaurant, and he drew on a napkin a diagram illustrating his theory. Everyone remembers this napkin. I wonder that's just an irrelevant detail. But but but somehow it presents the theory is something that ought to be obvious. It's also this sort of virgin birth that he whips out a pan and starts

doodling and says, here's where we optimize tax revenues. That makes what otherwise would be a fairly dry thesis very compelling and very visual. Yeah, it's it's almost like a joke. I mean, it has a punchline that that diagram is the punchline, because it says that there's always two tax rates to reach any revenue, and one of them dominates the other. And it's kind of something you can explained fairly quickly. Uh. And it's pungy. Yeah, it definitely is.

So that kind of raises a question in general about narratives and the economy, which which came first, specifically our stories driving the economy or is the state of the economy driving the narratives people used to explain it. Well, I'm not an extremist on the answer to that economists are an extremist ec I must say it goes only one way from the economy to the story. So we can just forget that. We don't care about the story. That's just trivia. You look at causation a little different.

I think it goes both ways, and so uh. It also interacts with another kind of feedback, which is the multiple rounds of expenditure. If you mean, if the government spends money, that becomes somebody's income, and that person spends some of that and that becomes someone else's income. This economy have loved this ever since John Maynard Keynes in the thirties. But that that isn't the only kind of feedback that's occurring. The other kind of feedback is verbal

from person to person spreading a story. And I think these two feedbacks interact. This is something for further research someday, but I mean, qualitatively, I can say what's happening. The the great recession that we just went through ten years ago was partly the result of the standard Keynesian multiplier, but it was also just people telling stories. It resurrected the story of the Great Depression, and you can see that in Google trends or other other ways of I

do with various kinds of searches. There was a huge impact of the Great Depression stock market crash that suddenly became vivid like this is happening again. Well, that's interesting because during the let's call it two to oh seven early oh eight period, it seemed that a lot of the stories were, hey, you can make a ton of money just buying houses and flipping it, and people's greed monster got stirred up. Hey my neighbors making all this

money buying and selling houses. I can also how much of that is also narrative um viral e going from one person to the next. Actually, the term flipping houses began to appear near the end of the moon. It was often used pejoratively it was crazy that this is getting crazy, And it started to appear around two thousand five, a couple of years or three years before the recession

really hit. Do you recall when some of the shows started showing up on HDTV and those channels flipped this house and it was a run of buy a house, fixed up cell at television shows. I think the first one was Property Louder in the UK, and then that was such a success will show it's it displayed flippers. I don't know if it called them flippers, but it displayed people who bought a house, fixed it up a little bit, used their interior decorating instincts, and then made

a lot of money fast. That was a powerful narrative because, first of all, it feeds your ego. A lot of people are decorating their own home and they think they're pretty good. Aht it. Even Donald Trump thinks he's pretty good decorating hotels. Um, So that's what that's the source of ego gratification. And justifiably, some of these people are talented. So but that doesn't mean that it's their talent that's creating the profits. It's the housing bubble that's creating the profits.

And people find it difficult to think logically and rationally about did I have this success because I'm smart art? Was it just chance? Just just a little bit of Look, let's let's discuss fake news. In the book you wrote quote the brain over time forgets that it once deemed stories unreliable. Explain what that means. Uh? Yeah, the way the brain you you remember stories that you heard in the past as a story, and you don't always have well tied to that story in the linkages in your brain.

What is the source of this story and is it a reliable source? So the source connection is somewhat weak. You have to remember where you heard the story if you're if you're gonna be telling the truth all the time, and we try to do that, but I think there's a human defect. So you just don't remember where you heard a story, but you're in casual conversation with somebody,

what difference does it make? You know, I might be telling a story that's not right, but it's a good story, and I'm not you know, I'm not saying this in bad faith. I'm not trying to deceive anyone. Nobody really knows what the actual truth is. So all kinds of untruthful stories bread, viral, e and it isn't anyone's ill will that that accomplishes that. You You also explain in the book that quote truth is not enough to stop false narratives. So that raises two questions. First is why not?

And second, if truth doesn't stop a false narrative, what does well? It does often stop false narratives, So I don't it's not all together, but The problem with theories are narratives that counter a false narrative is that they might not be contagious. It's just not fun, not as compelling. So we people can like to entertain each other in conversations. So if if I told you dramatically that something you

believe was wrong, you might find that entertaining. But typically, you know, you heard some stories somewhere and it's may or may not be true. But uh, I'm not fascinated by the story that it was wrong. It just kind of It all depends on the exact nature of the story. It can easily be that I don't you know, I didn't really care to hear this correction. I had a nice story that I was telling everyone, and you're telling

me now that it was wrong. Okay, maybe so a little cognitive dissonance kicks in, but the entertainment value is so. In the book, you tell the story about a British pop singer named Lily Allen, Uh supposedly did a gig in oh nine and turned down the opportunity to be paid in bitcoin, And if you would have taken that and then held onto the bitcoin, she'd be a billionaire. So first compelling story second, was it true? Yeah? This, uh may or may not be true. Who cares, right,

it's a nice story. I never verified whether it was true. I mentioned it in the book. But it relates to a basic human emotion called fomo fear of missing out, and that that is a driving for us. So you you also want to take investing tips quickly before you you know, have ruminated on them for a month, so you have to act quickly, so you fear of missing out is an important instinct that and maybe it goes back to our caveman days when you had the rush

to grab the food before some other caveman guys. It was a matter of survival, not just making a profit in the market. Quite quite fascinating. So let's talk a little bit about markets. And if we're talking about markets, we have to talk about bubbles. If I had to guess, the viral nature of bubbles and the stories surrounding them had to be a key driver in your desire to

write this book. Bubbles are perhaps what you're best known for. Um. Your work in bubbles and behavioral economics very much student contrast to the traditional economic thinking that markets are efficient and people are rational. Um, how much did bubbles have

to do with the ideas behind this book. I think that bubbles was a kind of the story that markets are efficient is a half truth that has been mentioned going back hundred and fifty years, but it never really became dominant until Eugene Fama wrote his famous article in the late nineteen when was nineteen sixties. I think and you and Farma both shared the Nobile process. Yeah, that

was ironic. It was an interesting experience during Nobel a week when I had to spend a week with Eugene Fama, who who was still on the view that I was totally wrong, But it was kind of It was kind of nice because it turns out that we didn't really disagree much U much that was factual. We agreed on the fact It's like it's a different narrative. So I like to describe people as swayed by narratives, and he

thinks of it as um, what is it? It's changing tastes, maybe are changing risk aversion that people are different than He's trying to incorporate these things into a theory. He has a company called Dimensional Fund Advisors. He he works for d f A. Yes, but he was the inspiration I think David Booth is the founder of that. Yes, he's been with them for what forty years something like that. So I I was congratulating him during Nobel week for showing decisively how he can beat the market through d

f A, and he didn't like that. That's not the way he wants to put it. So I stopped doing it. I was I think it was becoming unwelcome, even though I was congratulating him. He doesn't think that he's telling people how to beat the market. He's helping people to manage their risks. What I find fascinating that you and Fama won the Nobel the same year is that there's if you draw the Venn diagrams of your separate narratives,

there's a big overlap in the middle. The overlap is essentially markets are kind of sort of efficient, and it's very hard to beat them. He he will admit that it's very hard to beat that. Your narrative also adds and people are irrational, and sometimes that leads to markets going wildly out of off kilter before they return back to normal normality. I don't think Farma is a big believer that bubbles can be either identified or even defined.

It's just markets reaching extremes. That's one thing he said during Nobel Week that I challenge you to say when it was that someone could identify a major turning point in the market. But I agree with that. It's hard. It's hard to pin down when the turning point is going to come. Uh. So, uh, maybe maybe we're not that. By the way, I admire the man. He's brilliant. He's done some tremendous work. Let's talk about one other narrative

that has gone viral. What do you make of negative interest rates essentially exported here first from Japan and now Europe? How do these happen? Are we gonna see these in the United States? I recall, Uh, you had said a long time ago, Well, negative rates can never happen. It violates, uh, the basic laws of economics. Uh. Yeah, I used to teach that an hour out of minus a half percent in in the e EU. So that's but it never It can't get down to minus five percent. It can't

because you would hold cash instead. And it just reflects the difficulties of actually storying cash. Uh, and especially when there's so many trillions of dollars of it slashing around the system, right. So it's an interesting observation that now, I wonder, do you know this where they're negative interest rates fifty or a hundred years ago? They probably were at some point. I don't recall ever reading about negative

and just rates before the nine Japan situation. Um, but I have to imagine that at one point in time it must have been, right. It's just it's just not part of our narrative in the econ department. So it must be that somebody in the nineteenth century had a million dollars in cash and he wanted to store it somewhere,

and uh, someone said, well, I'm gonna charge you. I don't you know, if you think about the gold standard, that's effectively the equivalent of negative interest rates because you have to pay for storage and security for gold bars. How is that any different than negative interest rates for

bonds if they're effectively the same credit risk. So we used to talk to our students about the zero lower bound just because it's kind of cool, just like the gold standard was kind of So I talked about the gold standard in my book that the probably didn't really talk about the gold standard. They were just on it, right. Uh, it was a given, but then it became a moral value in the particularly when there was talk of bimetalism,

bimetalism meaning oh that, uh yeah. I compare it with bitcoin, because I think the emotional content of the narrative was very similar to bitcoin. It was a new financial innovation started to be talked about on the eighteen seventies. Let's go off the gold standards, have two standards, and it's gonna it's gonna stimulate the economy. That was a time when they were partly right because it would expand the money supply and that would cause inflation, and that would

wipe out the real value of debts. It would help farmers who were oppressed by deflation. So it has some element. But the point is it sounds like bitcoin. It was a shocker that someone would have it would go off the gold standard. Everything has been predicated on gold as the real thing, and you want to put some cheaper metal,

you're debasing the currency. That's a crime. You got very emotional, and it got an emotional in ways that were regional that East Coast intellectuals tended to be in favor of keeping the gold standard, and people out west, who maybe had less college most of them didn't have college at all. They were thinking they were pretty smart to have discovered this new bimetalism. Was it William Jennings Bryant who said we we don't need to be hung on a cross

of gold. I know I'm mangling that somewhat. Yeah, that's in my book too. Turns out he did during the eighteen nine Democratic Convention. William Jennings Bryan said you shall not crucify us on a cross of gold. But it turns out, and that's that it's so famous a quote that people still remember it today. Uh. The crowd went wild there. They thought it was the second Coming of Christ or something like that. Uh. It turns out that William Jennings Bryan was quoting somebody else. He didn't say so.

The other guy who said it was a congressman who just said it from some speech, didn't get noticed. It was it was that moment he was giving his acceptance of the Democratic nomination for the presidency at the convention, and there were newspaper reporters there. Uh, and the crowd went wild. Uh. And it just became a narrative that never got forgotten. Although we've forgotten that, we've forgotten bi metalism pretty much. We still remember that quote. We don't

know what it means anymore. Quite interesting. We were talking earlier about bitcoin, and of all the stories that that have narratives around it, the bitcoin narrative seems to be quite fascinating. I think of it as millennial libertarian gold. It's it's a younger generation with certain political beliefs, love the idea of this independent currency free of government restraints. Although that really hasn't seemed to be the way it's worked out, has it. It was a great story. Yeah,

the government is capable of taxing you. We now know that on your bitcoining profits, so they can get at your bitco They can as have hackers, you know, they're they're all sorts of new telephone hacks, and they're using it to go after people's bitcoin wallets. And on top of that, a lot of the trades on the bitcoin exchanges are are fake trades, just to uh, in fact, most of on some of them, Yeah, most are you gonna say? Most of the bitcoin trades on certain exchanges

are are fake? Are not real? They are not Well, I've read this, so I'm sorry. Now I don't want to accuse someone of a crime, but they're not regulated. Uh, and they're doing the story is this is a narrative which I'm repeating, is that they do wash trades. Uh. They want to show a lot of volume, which makes it more credible as a currency. Yeah, that's how you.

There has been in the history a lot of stock manipulation too, and we have to thank the sec for um for clamping down on that because that that would happen. So so some of the things we've talked about have been conspiracy theories to some degree. Why in the modern era, with our access to all this science and technology and and fact finding in truth sites, why have have these conspiracy theories become so prevalent? Is this something fundamental about

human beings and the way our minds operate. I mean, not just the moon landing hoax, but anti vaxer's. There's even a rise of flat earthers. What what is that about? Well, there is a First of all, there are conspiracies in his We know that there are conspiracy so a rational person has to be alert to possible can spiracies. But we also know that there is a a personality type that uh or maybe it's yeah, a personality type that

is h very UH influenced by conspiracy stories. They used to UH in the American Psychiatric Association's Diagnostic and Statistical Manual, they used to talk about paranoid schizophrenic people they have hallucinations about conspiracies. But in the latest edition they've separated it from schizophrenia and they now have something called paranoid personality disorder. So these are the extremes, and they're they're not schizophrenic, there's just something out about them. They're constantly

imagining conspiracies. So there are a certain fragment of our population, and people who are who are not suffering from any disorder but who are very inordinately focused on on conspiracies are even more numerous. So if you find someone who believes one conspiracy, talk to him further and there will probably be many more conspiracies that this person. If it goes a little bit, you can get a little bit crazy. So the Federal Reserve has been a subject of all

manner of conspiracy theories. Um, going back to the book The Creature from jack'l Islands, what is it about central bankers that lend themselves to these theories? Is that just a good narrative tale of a bunch of bankers secretly manipulating the economy from you know, behind the curtain. What what makes this such a compelling And there's a whole group of people who whose narratives are they just hate the Fed. We should end the Fed, get rid of

the Fed. What is it about central bankers that lends itself so easily to to these theories? Well, I think it's Uh, it sounds okay. I'm trying to focus like a literary expert who explains why some story is popular. Uh, it's partly because we're impressed by the monetary they's just like we're impressed by bitcoin or bi metalism. So it's a story about something mysterious. We have these pieces of paper in our pocket, and why are they valuable? They're

just pieces of paper. It's kind of a mystery. It has to do with power and feeling small. It makes you feel bigger and more important if you discover a a conspiracy resentment of people who maybe look more successful than you, and it's it's it's yeah, it's a bit of a mystery story too, that you've uncovered something that nobody knows, right, that most people are not evely assume isn't happening, so you can tell it's it's a good narrative.

So so, since we're talking about central bankers. Um in the book, you reference Stephen Invests, governor of Sweden's ricks Bank, Um, who said quote, I'm a weatherman, I'm a showman, and I'm an economist, but above all, I'm a storyteller. I tell stories about the future. How true is that for for central bankers? Yeah, I think he's right. The question to me is what's more important the actions they take or the words they say after the of f O

m C meeting. Is it the meeting or is it the press conference after um or or the nature of their statement. So I like to think that when the FED cut the lower bound to the federal funds rate to zero and right after this the rate recession, that that story brought up another narrative that is dangerous, and that is the narrative of Japan in the nine nineties when they cut their interest rate to zero, the Bank of Japan, and they were uh, and they had it

stuck at zero or negative it still is. That's like thirty years later and they had a lost decade. Then it turned out to be lost decades. The story was that Japan looked like the greatest strongest economy in the world in the ES. They wrote lots of books about that, and then something went wrong, uh, and then they couldn't get out of it. So I think it was a mistake to put ourselves into the camp of zero interest

rate countries. They could have kept it at basis points and not used the Z word, as I call it the zero bounty, because it then it makes the Japanese narrative our narrative. If you look at the nick bubble in the eighties, I believe I've seen some some analyzes that say they were four times as expensive as the dot com stocks. It was a giant pebble, really, so that collapse is still in one. The cape ratio was getting up sixty or seventy. Uh, it was really high.

And what were we in the thirties, Uh, during the dot com collapse, So we got up to the maximum at the dot Com peak was in the United States, So this is almost double that engine. Yeah, it was a lot higher. That's amazing. Let's let's talk about another narrative that I found fascinating from the from the book the shift from conspicuous consumption to uh, the modern frugality

and early retirement. How does something like that change over what was it twenty years from the conspicuous consumption era to spend as little money as possible and the fire group they invest and retire early group. Yeah, that might be happening. Uh, that is not. We still have a very strong consumption demand at this point in history. That might be something that would turn around with the next

recession even when it comes. But the big time when it did turn around, and its legendary is the in so in the in the roaring twenties, people were you know, that was the great gat speed time. People loved conspicuous consumption. Uh. And then something changed quite quickly after after the stock market crash of October Uh. And I found that narratives.

But first of all, Christina Romer Economic History and c E A chairman at one point showed that consumption demand dropped immediately after the twenty nine crash, Like why did people stop spending right at that moment? One way of learning about it is to go to the Sunday following the crash and listen to sermons. And they used to report sermons and newspapers. Famous preachers would get into the

newspaper for their sermon. It doesn't doesn't happen anymore. So I could read a little bit about what this and the sermons were very moralizing. But where we've been in this age of excess and now the stock market is crashing and it serves them, right, these pretentious, rich, show off people. So so there was something already bruin. There was some dissatisfaction with the twenties that was developing, and

it led to a different attitude in the thirties. Um that Winterfreed Holtby was a columnist back then, and she said one of her one of her columns, dare to be poor. There's so much more to I can't quote her exactly, but there's so much more to life than just keeping up appearances and showing off. So that attitude came back, uh, and I think that was part of the Great Depression. It also means the Great Depression wasn't as altogether bad as you might think, because it relieved

you of the of the obligation the show off. You could blame it on the recession and people would be perfectly under. On the depression, people would be perfectly understanding. They knew that some tragedy had fallen. Unfortunately, this was also a self fulfilling prophecy. It kept us in the depression, but it may have made life more livable. So that

raises an interesting question. Can can we talk ourselves into a recession if the economy is other otherwise fine and people are starting to get nervous about maybe it's a manufacturing contraction, maybe it's part of the trade war, a taffs. Can can we convince ourselves that a recession is coming and that affects our behavior that makes a recession come? Absolutely, That's that's what I think is at risk right now.

If you go to Google trends, you will to look that allows you to find out what people are searching for through time. There was a huge surge in searches for the term recession in two thousand seven, just before the recession began, and we see another such surge right now. So Google trends has been used to predict influenza epidemics. It can also be a that way of predicting economic narrative epidemics. So somehow we are really talking about recession

and we're not in a recession. So we'll see what happens. It may well trigger every session. Let's let's talk about something that's been around for a long time, and it's how technology is going to take all our jobs away. Uh. First it was automation, then it was artificial intelligence. Now it's robots are coming for our jobs. Why why is this such a persistent theme throughout hundreds of years? It goes back thousands of years actually, but not as strong.

It's it's it started with the Luddites in eighteen eleven and then the swing riots in the eighteen twenties where uh, common labor was being replaced by uh we you know, fat fabric machines and factories or or agricultural devices that simplified harvesting. Um. But it's it's so this narrative has been around for about two hundred years, but it flares up at certain times. It's like a disease. It mutates, and the narrative mutates, and it flares up and it

can cause problems. Uh. It did that in the eighteen seventies, uh and uh or in the eighteen nineties and the ninet especially in the Great Depression of the nineteen thirties that they were talking about robots in the nineteen thirties, and they were worried that this is it, this is a major this will go down in here. The year ninety nine will go down in history as a major turning point when people of common labor will be impoverished

from now on. That was something a lot of people believed and discourage them from spending because they thought, I better start saving for this feature that's coming. But then we that's not part of our story about the Great Depression because that was something that didn't It was something that false theory. It didn't happen um and and so we've just don't no longer attach that to the explanations of that event. So what about the modern era where

we're seeing automation replace a lot of jobs. We're seeing software and artificial intelligence. On Wall Street, half the trading desks have been replaced with software. There's talk about accountants and lawyers seeing a lot of their their work being automated by software. There's even artificial intelligence writing news stories by just identifying specific facts and and putting them together. They have sports, they can do a sports with a

data feed. So, so is there a reason to be concerned or let me rephrase that some of these stories would sound silly and scary and retrospective, appear to have some degree of truth. That technology does replace certain, at

least repetitive non creative jobs. Well, I wouldn't say, uh, is translation a repetitive non creative Probably Well, if you're translating poetry, not if you're translating something from French to English or from uh, you know, Google Translate, you could basically get a not great but usable translation of of just about any language to any language. So I think

there is reason to worry. And it goes back to the notion that economists have that the in an competitive equilibrium perfect equilibrium, UM, people's wages are there equal to their marginal product. If you have to sell for what you can get and there's no sympathy or morality that intervenes, then you're you're gonna get you what you can contribute at the margin. And the problem with that is that technology changes that. It's not your fault. So there's no

reason to think that it can't happen. It hasn't happened, um, But maybe maybe the turning point is about to come, or it has already started coming. Within inequality is rising. It's partly because the problem is whether we can invent new roles for ourselves that would value people, uh as opposed to robots. I think we don't know. But but nobody can speak authoritatively about the future. Uh so, so it becomes a place for narratives. So so let's talk

about not the future but the past. How do narratives change over time? You you mentioned the Great Depression. It sounds like the narratives around the Great Depression have morphed so real times, from the twenties to the thirties to the present day. Yeah, the the if you do account of the phrase great Depression, it has been growing ever since it maybe the end of World War Two. They didn't call it the Great Depression. In the Great Depression?

What then? Uh they they would call it hard times, But it wasn't singling it out with a special name. When did that start? There was a book written in nineteen thirty four by Lionel Robbins at the London School of Economics called the Great Depression, So yeah, it was. It was a book. It was talked about. So you'll see references to the Great Depression from nine thirty four on. But it became kind of a story of our lives

later and it gradually grew. It was growing continually, pretty much continually in terms of counts of that use of that. In the nineteen fifties, John Kenneth Galbray throughout a book called ninety nine The Crash. Uh. That was a best seller, and I got a lot of attention. People began to worry, are they've been worrying all that time about it possibly coming back? But it didn't because there wasn't The narrative was growing, but it wasn't focused on something that's about

to happen. And it came back in two thousand seven with vengeance when uh George W. Bush gave a speech that was later described as very much like uh Franklin Delano Roosevelt's the only thing we have to fear is fear itself speech. Uh So uh George W. Bush translated that into anxiety can feed anxiety, But it was he gave the same talk so and a lot of people remember that. You wouldn't think that one talk from three would still be remembered. Were very selective in what we remember.

That was such a catchy phrase, the only thing we to fear is fear itself. You know, it's funny you mentioned um George Bush heading into the financial crisis during oh eight oh nine. I was calling it the financial crisis, but it seems a few years later we started calling it the great recession. That that name seems to have It was a credit crisis, it was the subprime debacle. It seemed to have changed over time. How common is

that historical revisionism with the giant uh viral events. By the way, that the term great recession was first applied to the seventy five recession in a book by Otto ex Dyn, I think that was the title of his book, the Great Recession um, and that was a giant By the way, for people don't remember, stock market fell almost is the same amount as it fell in Awight o nine.

It was about a fifty seven percent drop at least the dal Jones almost serious recession are oil embargo that whole earlier, and big inflation that was not a fun period. And then in nineteen eighty through eighty two we had twin recessions, the double dip. Yeah, this is the second oil crisis now, And there were people around at that time who called it the Great recession, but none of those stuck and I'm not sure why. Um uh and uh.

You can't control these these narrative epidemic. So I have to admit I now sometimes refer to the two thousand eight nine recession as the Great Recession, because everybody knows what I mean When I say that you lose the battle. I'm saying, no, it's the nineteen seventy four seventy five recession. Also, even the word recession wasn't used until ninety eight. Oh really, what was the more common phrase depression? Really? So I know we had a number of market crashes and economic events.

We're at the nineteenth century, before there was a federal reserve. Those were not cold recessions. They were called depressions. Well, there might have been some creative use of the word, but it wasn't the name for them. So yeah, they would talk about, um, business depression. They didn't say depression either, They say business depression, but it wasn't clear that that was a name for a phenomenon is just yeah, like business downturn. I could say economic contraction. Is that a

more modern use? Have to check that one. It sounds that sounds like it came in with Burns and Mitchell and the book. I'm not sure, but the language does change, but the language changes means something because different words have different connotations on associations in our mind. Quite fascinating. Before we get into some questions we didn't get to. I

remember you and I doing a television hit together. It had to be like oh five or six, talking about the house flippers and how prices had run away, and people looked at us like we were crazy. I think it was it was it was Griffith. His name Bill Griffith, Bill Griffith. I mean, my memory isn't I think? I think I remember that event, and and I just recall that any time you anybody brought up the possibility that, hey, you know, these things don't grow to the sky forever.

Rates are crazy low, they can't stay that way forever. In the midst of the boom. If you bring up the narrative that this is going to end and end badly, people look at you like you're you know, like you have the plague. It was an astonishing period. Yeah, I I remember that. It was emotionally difficult the experience to make. And although you've never been afraid of taking a unpopular contrarian position, most of which turned out to be correct

over time. Yeah, it with some anxiety though, because I'm basing it on things that are not leading indicators identified by statisticians and uh, I have a sense that some of these leading indicators became leading indicators because of a self fulfilling Once people believe they're a leading indicator, they they make it happen. So there's a little chicken and egg problem with that, because they don't become resonant until

they have a track record. So some of it just becomes a little luck as to what happened to work once before. How important is luck to not just one thing going viral, but something becoming a regular resource that people use for decades. I don't know how to answer that. I say it reminds me of a book by not seem Toler called Fooled by Randomness, and it takes the form of a no, it's a great fun about a man named Nero Tulip, which is the author. Is this

a distortion of the authors? It's autobiographical? But you go through life feeling ashamed and elated when random events made you a success or a failure, and you just can't believe that it's just random. Well, we have a tendency to want to take credit for things that work out and want to blame outside factors. Yeah, but you might actually blame yourself. People do blame that. They won't do it publicly, but internally they get depressed. And that's that's

because they a little imposter syndrome or or something that. Yeah, so a couple of questions we didn't get to that that I have to ask you about. Um. So you've written a ton about market bubbles and investor behavior. Um, but behavioral economics is more diagnostic than prescriptive. It tells what could be done, rather than advise people what to do. And that kind of reminds me a little bit of the bias blind spot. How people, um have an inability

to see their own biases. So so what can investors do? Uh? If we know we're all biased, but we personally don't see our own biases. Well, UM, I don't have a good I can tell you what books to read. How about Danny Danny Kaneman's Thinking Fast and Slow. That's been a best seller. Uh, And it tells you about lots of biases that you probably have, and you didn't know about it, um. And then two stories I had I have to ask um from the book. One is about

blue jeans just dungarees. How has that I'm wearing. I'm wearing stretch blue jeans, which kind of made me think of how blue jeans have changed over time. It started out that this was for farmers and ranchers. Well even yeah, it's right, they were work clothes. Uh. And in the eighteen sevent dies, I think there was a governor of Indiana called blue Jeans Bill who would wear blue jeans to formal occasions and that he thought he was crazy, but he made him famous and he was just didn't

want to be pretentious. Man was it? Was it real? Was he a man of the people governor? And man? Yeah, a man of the people who wanted to show that he was. And it's had that sense to it ever since. It's Uh, I'm I'm real, I'm not the fake. Uh. It developed in the nineteen twenties further with the dude ranches. That was another new Uh. That's where you would go to a ranch and you'd ride horses and lassue and pretend to be a cowboy, pretend you were a city person.

But you could do it for a week and you'd buy a pair of blue jeans and then and then it kind of showed that you were into the in things. You were doing dude ranchy things. And then in the nineteen thirties it became fashion and that's when they started ripping their blue jeans and making them look worn, uh

to heighten the effect. Uh. And then it got h impetus uh from uh The Rebel without a Car James Dean, where he fashionably wore blue jeans for the whole movie, and it had that was a powerful narrative that that movie was admired. Right. He died in a crash driving a Porsche like a month before the movie came out. Kind of that kind of made the movie go viral,

didn't it. Yeah, it depends on things like that. Becoming assassinated helps your narrative, or murdered or or or die in a accident that reveals your reckless side, which is what James Dean did. He was speeding, right, and that was part of the character in the film. Yes, Uh, it was. It was a good movie resonated. Um. So, So the other thing I had to ask you about

was on expectations um. Pedro Domingos is a machine driven linguisting linguistic processing expert at Hedge Fund daw And and his quote, emerging narratives determine expectations, and expectations determine everything else. How important are expectations to to narratives? Right? Well, I think, uh, this is older tradition and economics where people would ask people, what what do you expect the inflation rate to be

this year? Uh? George Katona, who was a founder of the Michigan Consumer sentiment Well, one of the founders of the Michigan Consumer said that he interviewed people and I talked to them directly, and he would ask them, what do you think the inflation rate will be this year? And he got the impression he said that people don't really Uh, they looked lost, what what is the inflation rate? I don't have any clear idea And then if he pressed them, they'd come up with a number. So he said,

they don't exactly have expectations. But maybe a lot of people don't. Um, but maybe it's uh, it's more like stories about they heard that the price of something went up over the last year and it's been doing that Uh. And so they're upset and they're angry. Uh and uh, they can talk like that. If you force them to do it, then they'll just say, Okay, my expectation is

ten percent. But they didn't have it. Someone once said that the reason oil and guessoline prices are so important to people's expectations inflation expectations is it's the only product you buy that the price is displayed in toll numbers on fort toll signs, and so you everybody sees it. You can't help but notice it. How important is that too? Stories of prices rising or fall. Yeah, So visual images

matter for stories. Also, a sense of identity matters. So the inflation problem became the most serious problem facing the country according to Gallup polls in some time in the seventies eighties, maybe say seventies. Uh. And we had a very big bout of inflation during that era. Uh right, So, but I think that what I was gonna say is that it not only affected people's lives directly, but it

also made them angry. And they started blaming labor unions for the inflation, for bidding up, for forcing companies to wage price raise prices in order to pay the higher wages they were paying the unionized members, and it led to a public reaction against unions, and it led to ultimately to Ronald Reagan and a general diffusing of the power of unions. Now by the time the seventies and eighties came around, hadn't unions have been fooling for for

some time? Well? I don't. Yeah, when I when I named Ronald Reagan, I don't mean that he invented the narrative. He was uh. He good politicians know that they can't routinely invent there. You can you can add some um similar narratives that strengthen it, but you have to accept that people are onto a certain story. And to be a successful politician, you want to, uh, you want to repeat the story. So he fired the air traffic controllers when they went on strike, which I believe was the

first time something like that had happened. That played right into the we're not going to take it from unions anymore narrative, right, So he knew how to create a new narrative built around a emerging narrative, so it would become part of a constellation of anti union narratives, and and that had an impact on prices or just public perception of that was a major turning point, now just for the US, but around much of the world, that the inflation rate was up in the double digit range

per year UM and that it started to come down right from that date. So these are big changes in economics. Uh, events that are narrative driven. So economists tend often to be focused on predicting month to month fluctuations. Uh, and not why did there why was there a global peak and inflation around? And that I think has to be understood through changing narratives. Now, I would credit Paul Vulcar and his actions is fed chief raising rates double digits

in order to break the back of inflation. But you're suggesting the narrative favors what Ronald Reagan did. Well, I think they both were important. Fact isn't. It's a complicated story. But Voker might not have had the political cap to do that if if the public wasn't already angry about inflation. So it was a it was a courageous thing for him two to create the Great Recession it was called at the time, uh in in the nineteen eighties. Uh.

But he he was judging. I think that he did have these uh that people were angry about that there've been all this talk about controlling inflation. Uh, and it just gets worse and worse. And they also believe this was part of the popular narrative then that it eats into my wallet. They didn't. They didn't think as many economists did that it would it would get into their paycheck as well, even though they weren't unionized by uh

by market forces. Huh. Quite quite interesting. So now let me get to my favorite questions that we ask all of our guests. This is sort of our speed ounds. Feel free to go is as short, uh as you want? Tell us the first car you ever owned. You're making model. My parents gave me a Rambler Ambassador in the nineties sixties because it was a safe car. And I don't follow my parents too much in detail, but I've been

buying safe cars ever since. I recall taking a cab with you once and in the back seat you put on the seatbelt. I don't know a lot of people do that, um from a safety perspective. Not the Rambler, by the way, not the Porsche Speedster that James Dean, that's right, I'm not a James Dean Duke. Um, what's the most important thing people do not know about Bob Schiller? So? Uh, I don't know what's important about me? Uh? Is it something about my personality? What? What do people not know

about you? Uh? Well, I okay, I'm thinking, Uh, this is just off the wall thought. But uh, I think people differ in their um uh, their ability to focus attention, and their ability to complete projects. I think I did. I was a project oriented person from childhood, but distractable. My secretary will tell you I'm distractable, but I keep coming back. So I think that people like me should do things like write books. And this is what your six book? Your how it could be? I say tenth book? Um?

Who were your early mentors who affected your career? Be it in academia or economics? Okay? Um in elementary school, I don't know his first name. Mr Keener is my science teacher, and he encouraged me I wanted to be a sign dentist. Really I am a social scientist. And also my high school geometry teacher, Mr Sucy I think it was Roger Suci and now know his first name?

Who uh encourage me about mathematics and I wrote a extra paper for his course, which he didn't even ask for, in which I use the differential calculus to derive a formula for the length of a spiral, And he was so encouraging. You're doing original mathematics. I assume somebody else has already done that, but I don't know where. I assume I got it right. I don't know, so um, tell us about some of your favorite books. You've mentioned numerous books so far. What what books do you really enjoy?

What do you read for pleasure or fun? See? One thing is that I am distractable, so I often don't finish them. I jump around and look for interesting places. Are you reading like three or four books at once? What I'm doing right now? It's strange. I bought in an antiquarian bookstore a bound volume of for eighteen forty nine of Little Living Age ever heard of it? It was an intellectual magazine like the Atlantaker Harper's from that time, and I thought, I'll just, you know, every night, I'll

read one issue of it. Uh, And it just brought me, brings me into the year eighteen forty nine. I'm letting them decide what I read. Do you do you I make discoveries about the path. For example, I discovered that women's liberation was already I just read a story about famous women poets in that in that volume in eighteen forties eighty nine. Yeah, and they didn't mention Emily Dickinson. So then I looked it up. She was only nineteen years old in eighteen forty nine. What what are the

books have you? What? What do you like to recommend to people? What or what book just resonated with you? So I don't know if I recommend books very often, But I like autobiographies are of diaries. So the autobiography of Benjamin Franklin influenced me. Uh, He's autobiography, not somebody else's biography life. Uh. And the diary of um uh the name the version wrote the like of of Samuel Johnson, James Boswell, Uh and uh, I just like real thing. I like to hear people from the past talk to me.

That's what little the living age is doing for me. And having people from the past, I want to go back there and hear them. So James Boswell his own autobiography, Yeah, in fact it was written on a daily It's really a diary what he did today and he did a lot of things that were not entirely moral. He didn't plan to publish it, apparently from the standards of his age. Um, but he was an overall a nice person. Um. What do you do for fun? What do you do when

you're not researching and writing your own books? Uh? I read things. I sit with my wife. Now I'm watching television more. But it's whatever she chooses. What sort of stuff are you watching on TV? Or things like John Oliver and uh oh, the PBS News Hour. These are her choice. But I liked them too, So that's interesting. Tell us about a time you failed and what you learned from the experience. Well, I I had a firm called Macro Markets that failed, but it didn't completely fail.

It went under, it uh collapsed. It's no longer in exist, but it did leave a legacy, which was what well we We wanted to create markets for real estate, and there still is. The Chicago Mercantile Exchange still has a market that we helped them create based on the SMB Case Schiller home Price now Core Logic home price industry. So I think what we did change the world, and even if it didn't make us rich. See part of

the inspiration. It's part of the pleasure. I'm living out my father's dream, who wanted me to be an entrepreneur. There's something about creativity that is rewarding even if the business doesn't succeed. Well, you created the cape ratio, and I know there are a number of mutual funds based on that. There are that that's fairly entrepreneurial, right. Uh, yeah, I I have the American it's not just American, the entrepreneurial spirit that I got from my father. Um, what

do you most optimistic and or pessimistic about today? I don't like to be too pessimistic, and I'd like to do that. Uh, but I am worried about things like global warming and possible possible crisis in the planet. Uh. You know, we don't like to think about these things. I think we should be more concerned about making agreements with other countries about how we're going to handle h environmental crises like global warming. We might not be able to see them now and identify them, but we should

have some risk sharing agreements. What are we gonna do if global warming gets so bad, for example, that some country is unlivable, where do they go? You know who wants to take them in. That's the problem. That sounds like quite the problem. Um. So, if one of your students came to you, or a millennial came to you when I was looking for career advice about working in the field of either behavioral economics or finance, what sort of advice would you give them? Well, this would be

very general. I think that, Uh, finance is an important field I teach. I have an online course that's free, by the way. On course there are called financial markets. And I'm very proud of that because I have educated so many people, not just from Yale, but from all over the world who went into finance. So I think finance is a good field because it solves problems. Uh. And it's not the government solving problems, although it can also be. There's government finance as well. Uh. And behavioral

finances just finance coming into reality, I think uh. Uh, it's not as behavioral finance is not a job category like finances. UH. But I think in order to be well rounded, when should know something about it. I tell my students, UH, in my course financial markets, even if you don't want to go into finance, you should take this course because finance is about making things happen realistically. How do you finance activities that are useful for society?

Quite interesting? And our final question, what is it that you know about the world of economics and narratives today that you wish you knew forty years ago? Uh? I think I'm stalling on this one. I wish I knew everything that had come up. And there's so many details and uh one one thing. I just visited the Behavioral Insights team in UM the UK last week and very impressed with all the things. But not now. These are

sprouting up everywhere. They're they're they're consulting groups effectively that help people, uh do their they're financing more effectively in account of of what we know, and there's so much not a lot of it is experimental, and uh, you have to try things out and see what how people react because how people react is not for not mostly predictable based on just the first theory. Quite interesting. Thank you, Bob for being so generous with your time. We have

been speaking with Professor Robert Schiller of Yale University. His new book, Narrative Economics, How Stories Go Viral and Drive Major Economic Events was released on October one, If you enjoy this conversation, we'll be sure and look up an inch or down an inch on Apple iTunes and you can see any of our prior two hundred and fifty or so conversations we've had over the past five years. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net, Go to

Apple iTunes, give us a nice review. We really appreciate that. I would be remin us if I did not think the crack staff that helps put this together each week. Attica val Broun is our project director, Michael Boyle is our booker slash producer, Caroline Ria is our audio engineer today, and Michael bat Nick is my head of research. I'm Barry Ritolts. You've been listening to Masters in Business on Bloomberg Radio.