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Robert Shiller on Viral Epidemics and Narrative Bubbles

Mon, Feb 3, 2020 - 5:32pm

Just months before the coronavirus outbreak in China, the Nobel-prize winning economist Robert Shiller explained on FS Insider (click here for interview) how biological viruses provide tremendous insight into the spread of narratives operating in the economy and the markets.

Though this concept is not entirely new, what Shiller shows in his new book, Narrative Economics, is that this mapping of psychological viruses within an economy goes far deeper than pure metaphor.

“A lot of people link these things together,” Shiller told listeners, “but they wouldn’t think to go to a medical journal and read mathematical epidemiology.”

Shiller did just that and explained how narratives spread via the same variables modeled by epidemiologists when it comes to the spread of infectious diseases.

As one would expect, narratives go viral because we spread them either by word-of-mouth or, increasingly, via social networks that affect a much larger population more quickly. With modern technology, we can now track how they spread and mathematically model them. Those models, Shiller argued, are plucked straight out of epidemiology.

As with viruses, Shiller points out that narratives have little concern with human ethics or notions of "truth" or "falsehood". All they care about is spreading and, as such, often utilize self-reinforcing mechanisms to ensure their survival, which will often end up sickening or killing their host.

Where do we see that in the economy or in the markets with narratives? Financial bubbles and panics, which almost always have a strong narrative at their core and end up devastating investors or killing sectors of the economy.

Narratives will also mutate and cause new outbreaks over time. Shiller shows how a number of narratives currently circulating today are actually just old ones that have taken on a new form. Some of the words or concepts creating the narrative may have a slight adaptation or be part of a different set of what he calls “narrative constellations,” but they are often just earlier mutations of prior narratives that continue to survive over the years.

There are many parallels and insights Shiller discusses in his new book, Narrative Economics: How Stories Go Viral and Drive Major Economic Events. For those interested in learning more, pick up a copy of his book or listen to our exclusive interview with the Nobel-prize winning economist by clicking here.

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