How storytelling drives finance and economics…

Brendan Markey-Towler who is an Industry Research Fellow at The University of Queensland has a nice piece.

He says whatever the model and its logic, finally it is the story which leads people to invest in markets:

In his recent presidential address to the American Economic Association, Nobel Laureate Bob Shiller drew attention to the importance of narratives in economics and, particularly, in financial markets. This corroborates some recent research by the author and colleagues at the University of Queensland into the psychology of economic behaviour.

When we tell ourselves stories, we link up a number of different events into a coherent whole. In financial markets and across the economy as a whole, these stories not only affect expectations but are expectations. And expectations shape behaviour.

Our research shows that the more simple a story, the more it extends and agrees with preconceptions, the more persuasive it is. A good story becomes embedded in investors’ minds; the story becomes the expectation.

If a narrative embedded in the mind of an investor tells a positive story about, for instance, profitability, they will act on it. A positive story results in good news in the financial markets.

It is a pity that this building of narrative was once a major strength of economists. This is how they captured the imagination at the first place. Now it is all hopelessly lost.

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