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Why Economists (Don’t) Tell (True) Stories

by Shlomo Maital

   After decades of researching and teaching economics, I became increasingly troubled by my discipline. I did not find truth in the math and numbers economists love. Instead, in teaching managers and future entrepreneurs, I found truth in what economists largely despire – N ≤ 1, that is, stories about real people. Often, when I tried to make my seminar talks interesting and meaningful with narratives, I got the devastating criticism: Stories! A word worse than Nazi, Fascist, or pedophile, for economists.

       This is why I was so delighted to read the article by Carmine Gallo in Forbes, published way back in January. Gallo reported a speech by Nobel Economics Laureate Robert Shiller at the World Economic Forum, in Davos. Shiller is a behavioral economist who writes wonderful insightful books about how people behave. Here is an excerpt of what he said in Davos, according to Gallo.  Warning – it’s rather long, but I think worth the time.

   “This week at the World Economic Forum in Davos, Shiller banged the drum on a topic that’s near to my heart — the power of narrative to drive human behavior. Shiller didn’t mince words.   “Most people think in narratives, but economists are terrible with narrative,” he said. In a follow-up interview on CNBC, Shiller said, “Last year I chastised the [economics] profession for neglecting what you media people know. Narratives drive human behavior.” To study narrative is to examine ourselves. We think in story, process our world through the lens of story, and use storytelling to communicate ideas. One prominent economist believes that stories are the heart of human behavior. He says to understand the power of narrative is to understand financial booms and busts — and to prevent crises from getting worse.

   Robert Shiller is a Nobel prize-winning economist at Yale. He’s written books and papers warning of bubbles in the stock and housing markets before they happened. “The human brain has always been highly tuned towards narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing,” Shiller said in his speech. “Narratives ‘go viral’ and spread far, even worldwide, with economic impact.” Shiller says that the same epidemic models that trace how disease or viruses spread can be used to describe the word-of-mouth transmission of an idea. Stories spread ideas like a contagion—infecting one person and another, and another. Some ideas, of course, are great ones and should catch on. But some stories—once they go viral—can have a damaging impact on world economies.

   Stories continue to impact our economies today. Shiller says the financial crisis of 2007-2009 also followed “a narrative-based chronology.” Financial busts are “driven by a cadence of stories.” Stock market and housing bubbles are formed when people hear stories of easy money being made. Panics make declines worse as stories of losses go viral.”

   Another narrative that Shiller and several other economists brought up in their panel at Davos is today’s prevailing storyline that humans will be replaced by machines. “

   For decades, we have heard, every 15 years or so, the story of how very soon machines will replace humans. They never have, and never will.   Economists preached the story how unbridled uncontrolled greed would make human society happy healthy and wise. It didn’t.  So – economists DO use stories, they weave stories based on numbers – and very often, distressingly often, get it wrong. But no matter—people believe the stories, and economists continue to build false ones.  

   There is hope. Modern economics is dominated, among the young, by the effort to understand and research human behavior. And this work, pioneered by, for instance, Dan Ariely, is based on great narratives built on real people and real dilemmas.  One day, mainstream economics will be as behavioral as anthropology or psychology.

   Alas. I was born too soon.







Stories and Feelings: Powerful Tools for Creative Thinking

By Shlomo Maital

Feelings in History

 My last blog was posted nearly two months ago, on March 30. Shortly after, I left for China, for teaching and lecturing. WordPress was not accessible in China. Then, on returning home, I somehow found it hard to restart the blog machine. I deeply regret this, because knowing I have blog readers keeps my eyes and ears open for ideas….   So, this is a ‘restart’, hopefully with no more long regrettable silences…

       Nobel Laureate in Economics Robert Shiller (Yale) wrote a wonderful piece in the New York Times, Jan 22, 2016, “How stories drive the stock market”. Shiller is the author of a fine book, Finance and the Good Society, about how finance could be (but alas, sometimes is not) part of the solution, not part of the problem.

      In his NYT piece, Shiller refers to psychologist Jerome Bruner, who showed how popular narratives (human interest stories) are “fundamental drivers of motivation”.

Shiller discusses the sharp decline in the U.S. stock market since early January, and describes the ‘stories’ that explain it. First, the slowdown in the Chinese economy – “gross exaggeration” of its importance for the U.S. Second story: “record for poor performance of the stock market in the first week of the year”… Third story: low oil prices.   Fourth: tripling of the US stock market from 2009-14, and its “unwinding this year”. Many missed the big tripling, owing to pessimism and fear after the 2008 crash.   This created heightened sensibility about a possible fall, after such a surprising precipitous rise.

     Shiller cites a fine book by fellow Yale professor Ransay MacMullen,   Feelings in History: Ancient and Modern, (2003), in which he writes, “History is feeling. It is feelings that make us do what we do. And feelings can in fact be read. But the reading of them requires writers and readers to join their minds in ways that have long been out of fashion among students of history”.

     History, financial markets, consumer spending, virtually everything in our economy is driven by feelings. And feelings are evoked by stories about people, challenges, conflicts, crises and how they deal with them.

       Conclusion?   When you invest, try to analyze the prevailing ‘narrative’ or story that is driving human behavior, including the emotions underlying it. Is it valid? Is it evidence-based? Or is it superstition and empty guesswork?   If the narrative is groundless, sooner or later (it might well be much later!), the story will change and reverse.  Consider a contrarian (buy when everyone is selling) strategy.

       What is the TRUE story? The real narrative?   How do you know? What stories are people telling themselves?  

         In your startup business – what is YOUR underlying story, the story about how you create value for your clients?   Is it powerful? What emotion does it evoke?

       Feelings drive behavior. If you’re investing, a buyer, analyze which feelings are at work, and why, by identifying the dominant stories. If you’re an entrepreneur, a seller, shape your stories, by identifying clearly the motion you want to create with your innovation, then build everything you do around it, with a powerful narrative.


Phishing for Phools

By Shlomo Maital

Shiller Akerlof

Robert Shiller & George Akerlof

It is really bad journalism to write about a book without reading it. But I’m going to do it anyway, based on an excellent London Review of Books article by John Lanchester. The book is George Akerlof and Robert Shiller’s Phishing for Phools (Princeton, £16.95). My friend Peter Dougherty, who heads Princeton University Press, has come up with yet another great economics book. I plan to read it very soon.

   Shiller and Akerlof are Economics Nobel Prize Winners – Shiller, in 2013, for pioneering work in behavioral finance, and Akerlof, in 2001, for his insightful and unconventional microeconomics research. When two create unconventional thinkers like these put their heads together, and write fearlessly, the results have to be good.

   Here is an excerpt from Lanchester’s review:

  “Phishing for Phools is about ‘the economics of manipulation and deception’. Akerlof and Shiller aren’t using the word ‘phishing’ in the sense in which it’s usually employed…. Here, they use ‘phishing’ to mean ‘getting people to do things that are in the interest of the phisherman, but not in the interest of the target’. A phool is someone who has been successfully phished. If you buy a two-quid packet of ibuprofen, [instead of one that costs 35 pence, a generic package]…..that’s you.”

   “Conventional economics struggles to deal with phenomena such as this. Why would rational consumers making rational decisions to ‘maximize their utility’ pay seven times more than they need to for anything? You could bodge together an argument that it’s rational by claiming that the branded version of the drug is safer and more trustworthy – but, truthfully, in a regulated developed market, that’s bullshit.  For non-economists, the explanation is perfectly obvious. Somebody is – perfectly legally – trying to rip us off.”

   “They talk about the Age of Reform, from 1890 to 1940, and the proof it provided that ‘government, used effectively, can be genuinely beneficial.’ This was replaced by what they call the New Story, beginning with Ronald Reagan’s statement in his first Inaugural: ‘In this present crisis, government is not the solution to our problem; government is the problem.’ The New Story is Akerlof and Shiller’s term for the whole anti-government, anti-regulation, neoliberal narrative in American politics and economics. It is, they argue, just another phish, whose characterization of the economy and of US history is wrong.”

     So, have Americans simply been fed a wholly wrong, misleading view of history? Are the government regulators the heroes, preventing phools and phishing, rather than the goats? Do we need more regulation rather than less? Do we need regulators to protect ourselves against ourselves, as the authors show, when we tell ourselves wholly false stories that play into the hands of the manipulators? Let’s keep this in mind, as efforts proceed apace to weaken or destroy the 2009 Dodd-Frank Law.


Fama’s right. Shiller is right.  They Can’t BOTH be right?  You’re right too!

By Shlomo Maital      

         Fama Shiller

Eugene Fama & Robert Shiller

 Univ. of Chicago Economics Professor Eugene Fama has won the Nobel Prize for Economics this year, for his research proving that capital markets are fully efficient and rational.

  Yale Univ. Professor Robert Shiller has also won the Nobel Prize in Economics this year, for his research proving that capital markets are irrational and inefficient.

   Wait.  Yet again?  Two economists win the Nobel Prize for proving the diametric opposite?  You say, they can’t BOTH be right?

   Well – you’re right, too.  Everybody is right.  And that’s what’s wrong with economics. 

   Sure, you can finesse this mess. You can say, well, capital markets are usually rational, but sometimes they’re not. 

   Not helpful.  When are they NOT?  When are there bubbles?  How do you know? 

   These diametrically opposite Nobel Prizes for Economics would be impossible in Chemistry or Physics.  There, you have to show clear results.  Higgs won it, for Physics, because at CERN they found strong proof that the particle Higgs theorized actually existed.  They didn’t give the prize simultaneously to someone who proved it did NOT exist.

   Economics is in a sorry state.  The Nobel awards simply reveal that.

Bob Shiller’s Nobel:  Finance IS a Force for Good!

By Shlomo Maital      


   Together with Eugeme Fama (U. of Chicago)  and Lars Hansen,   67-year-old Yale U. Prof. Robert Shiller won this year’s Nobel Prize in economics for  ‘contributions to our understanding of asset pricing’. 

     Those laconic words don’t begin to do justice to Bob’s contributions.  He was among the few lone voices who warned that America was in a housing bubble, that would soon burst.  He knew this, because he had developed a reliable, accurate measure of housing prices, the Case Shiller Index,  that is widely used.   Earlier he warned that the stock market was in a buble, in his 2000 best-seller Irrational Exuberance (the dot com bubble burst in March 2000). 

    I encounter many MBA students (some here at EDHEC) who are fascinated by the world of finance, but who are pondering whether to remain in the field, because of the downsizing and layoffs in finance, and because finance was given a bad name after the 2008-12 financial crisis, owing to a handful of scoundrels.  I urge them to remain in finance, and to innovate and reform the industry, and reinvent it.  And I always recommend that they read Shiller’s new book, Finance and the Good Society (Princeton U. Press, 2012).   Here is how Shiller frames his pitch:

“… finance should not be viewed as inherently or exclusively elitist–separating people into different income groups, or as an engine of economic injustice. Finance, despite its flaws and excesses, is a force that can help us create a better, more prosperous, and yes more equal society.    In fact, finance has been central to the rise of prosperous market democracies and is unimaginable without them.  Beyond headlines incriminating bankers and financiers as self-aggrandizing perpetrators of economic dislocation and suffering, finance remains an essential social institution, necessary for managing the risks that enable society to transform creative impulses into vital products and services, from improved surgical protocols to advanced manufacturing technologies to sophisticated scientific research enterprises to entire public welfare systems.  The connection between Wall Street and Main Street is as fundamental for society as is the connection between the brain and the nervous system in the human body.” 

    Finance specialists:  Stay the course!  Innovate, create, seek blue oceans.  Finance needs you,  Nobel Laureate Shiller says,  and I strongly agree. 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital