In our increasingly interconnected world, the stories we tell ourselves can have powerful consequences, and sometimes, the lies we believe are more important than the truth. In the age of social media and fake news, it can be challenging to separate fact from fiction, and this can have profound implications for financial markets, as investors and market participants are influenced by the narratives and stories surrounding them. Whether it’s the hype around new technology, the promise of easy money, or the fear of missing out, the stories we tell ourselves can shape our financial decisions and drive the emergence of speculative bubbles and market instability. Now more than ever, it is more important than ever to understand the power of narratives in finance and be skeptical of the stories we hear.
According to the narrative economics thesis proposed by economist Robert Shiller, the stories and narratives that people tell about the economy and financial markets can have a powerful influence on economic outcomes. Shiller argues that these stories can shape people’s beliefs and expectations about the future and significantly impact economic behavior and decision-making. He writes: “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.”
The global financial crisis of 2008 was a major economic event that had significant effects on many aspects of the global economy, including the breakdown of trust in democratic institutions and the emergence of speculative manias. In the aftermath of the global financial crisis, many people lost confidence in democratic institutions, including governments and central banks, and this loss of trust may have contributed to the rise of populism and new speculative manias. For example, some people may have lost confidence in the ability of governments and central banks to manage the economy and prevent another financial crisis, and this may have led them to seek out alternative investments, such as cryptocurrencies or other assets, in an effort to protect their wealth.
The relationship between Robert Shiller’s narrative economics thesis, the breakdown of trust in democratic institutions, and the speculative manias that occurred after the global financial crisis is complex and multifaceted. While it is difficult to say precisely how these factors are related, it is clear that the stories and narratives that people tell about the economy and financial markets can have a powerful influence on our future.
The rise of self-reinforcing internet communities and the breakdown of collective sense-making in the post-truth social media era can contribute to the emergence of speculative bubbles driven purely by narratives and stories. In the context of Robert Shiller’s narrative economics thesis, the rise of self-reinforcing internet communities and the breakdown of collective sense-making can create an environment in which specific stories and narratives about the economy and financial markets gain traction and influence people’s beliefs and expectations. For example, in a post-truth social media era, it is easier for individual stories and narratives to gain credibility and spread rapidly, even if they are not based on facts or evidence.
In this environment, speculative bubbles can arise driven purely by narratives and stories without any underlying fundamentals or intrinsic value. These bubbles can be sustained by the self-reinforcing nature of internet communities and the breakdown of collective sense-making as people become increasingly entrenched in their beliefs and expectations, and it becomes more and more difficult to challenge or refute the narratives that are driving the bubble. These bubbles can be difficult to identify and predict and have significant consequences for the economy and financial markets.
It is difficult to say whether the phenomenon of narrative-driven speculative bubbles will give rise to a heterodox school of finance based purely on superstition, herd mentality, and groupthink. While it is possible that some investors and market participants may adopt a more heterodox approach to finance in response to the emergence of speculative bubbles that are driven purely by narratives, it is also possible that this phenomenon will be seen as a cautionary tale and that it will encourage more mainstream investors and market participants to adopt a more disciplined and evidence-based approach to finance.
Ultimately, the outcome of heterodox markets based purely on mania and narrative will depend on various factors, including the behavior of market participants, the responses of regulators and policymakers, and the overall state of the economy and financial markets. It is difficult to predict with certainty how this phenomenon will evolve, yet we can analyze its originations.
An epistemological public goods problem is a situation in which individual actors have incentives to behave and reason in ways that are not in the best interests of the group as a whole. In the context of financial markets, this could mean that individual investors and market participants have incentives to participate in speculative manias, even if these behaviors are not supported by evidence or reason.
However, it is possible that an epistemological public goods problem could arise in financial markets, where individual participants are incentivized to participate in speculative manias while simultaneously creating a group incentive for others to disregard evidence and reason. In such a situation, the self-reinforcing nature of the phenomenon could lead to financial ruin.
If this problem were to arise, it could create a self-reinforcing phenomenon in wahich speculative mania becomes increasingly entrenched and difficult to challenge. As more and more people become caught up in the mania, the incentives for others to disregard evidence and reason would increase, leading to a feedback loop that could ultimately result in financial instability. It is difficult to predict with certainty what the macroeconomic implications of this phenomenon will be on financial markets in the future. However, it is possible to make some general observations about the potential consequences of this phenomenon.
One potential implication is that it could lead to a more volatile and unstable global economy. As more and more people become caught up in speculative manias, the incentives for others to disregard evidence and reason would increase, leading to a feedback loop that could ultimately result in repeated market crashes.
Another potential implication is that the credibility and trustworthiness of financial markets could be undermined. As more and more people become disillusioned with the ability of financial markets to provide reliable and accurate information, they may be less likely to invest in these markets, which could have negative consequences for economic growth and job creation.
There are various steps that regulators can take to prevent this type of breakdown in markets. While there is no simple solution to the problem, some potential strategies include the following:
The phenomenon of crypto assets is a direct manifestation of the epistemological public goods problem that can arise in financial markets, as these assets are purely-narrative assets developed by insular internet communities, and their narratives are often based on incoherent or unproven ideas.
Crypto assets, such as Bitcoin and other cryptocurrencies, are digital assets created and traded on decentralized networks. Crypto assets are pathological financial assets not backed by any underlying cash flow, legal claim, or consumptive value. The value of a crypto asset is derived solely from the stories and narratives associated with it and the willingness of others to value these narratives similarly. These narratives are often developed and promoted by insular internet communities, which can create self-reinforcing feedback loops that drive up the value of these assets.
The narratives associated with crypto assets are often based on incoherent or unproven ideas. For example, some of these narratives are based on the notion that crypto assets are a better form of money than traditional currencies, despite the fact that they are not a medium of exchange backed by the state or supported by any regulatory frameworks. Other narratives are based on the idea that crypto assets are a form of digital gold, despite the fact that they do not have any of the properties that make gold valuable as a store of value.
The combination of insular internet communities, self-reinforcing narratives, and incoherent ideas can create a feedback loop that leads to speculative bubbles and market instability. As more and more people become caught up in the hype and excitement around crypto assets, they may be less likely to critically evaluate the stories and narratives that are associated with these assets, and they may be more likely to engage in behavior that is not in their own best interests.
The phenomenon of crypto assets can be seen as a manifestation of the growing distrust in democracy and the rise of populism in political thought. Crypto networks are not subject to the same regulations and oversight as traditional financial markets and are often promoted as alternatives to mainstream institutions, such as governments and central banks.
In this context, the rise of crypto assets can be seen as a reflection of the growing distrust in democracy and the rise of populism. As people become disillusioned with traditional institutions and the political systems that support them, they may be more likely to seek out alternative forms of money and finance, such as crypto assets, that are not subject to the same rules and regulations.
At the same time, the narratives and stories associated with crypto assets often appeal to populist sentiments. For example, some of these narratives are based on the idea that crypto assets are a form of “people’s money,” that is controlled by the users of the network rather than by governments or central banks. Crypto assets are often promoted to decentralize power and control over money and finance. This idea appeals to populist sentiments, as it promotes the idea that ordinary people, rather than elites, are in control of the money and finance.
However, it is highly likely that this ideology could backfire and that it will inevitably result in the creation of a new set of elites who control and benefit from the crypto asset ecosystem. For example, the individuals and organizations that control the mining and validation of transactions on the Bitcoin network have significant power and influence, and they could use this power to shape the direction and development of the network in ways that benefit themselves rather than the broader community. In this way, the ideology underlying the phenomenon of crypto assets could backfire, resulting in the “recentralization” of power in the hands of a new set of elites rather than empowering ordinary people. This ultimately undermines this movement’s supposed political imaginaries, revealing it to be based on a logical contradiction.
Wealthy and influential individuals and institutions may also use their influence and reach to create a new class of purely narrative-driven speculative bubbles. This could involve promoting and disseminating narratives about certain assets or investments to generate hype and excitement and drive up their prices. This is a form of Keynesian beauty contest, in which participants are not evaluated based on the intrinsic value or fundamentals of the assets but rather on the stories and narratives that are associated with them.
One potential consequence of this phenomenon is that it could further erode trust in financial markets. As more and more people become disillusioned with the ability of financial markets to provide reliable and accurate information, they may be less likely to invest in these markets, which could have negative consequences for economic growth and job creation. In addition, the emergence of these purely narrative-driven speculative bubbles could lead to more frequent and severe market crashes as investors become caught up in the hype and excitement and are ultimately disappointed by the failure of these assets to deliver on their promises.
It is also possible that the phenomenon of “incoherent economics” and “financial populism” could become a new form of religion in the sense that it could provide people with purpose and meaning, despite its internal contradictions. Religion is a powerful force in human society, and it has the ability to shape people’s beliefs and behaviors in profound ways. Many religious beliefs and practices are based on ideas and concepts that are not supported by evidence or reason, yet these ideas are central to the lives of many believers because they provide them with a sense of purpose and meaning.
In the same way, the phenomenon of “incoherent economics” and “financial populism” could become a new form of religion in the sense that it could provide people with a sense of purpose and meaning, despite its internal contradictions. For example, the narratives and stories associated with crypto assets and other forms of absurd economics could appeal to people’s desires for freedom and autonomy and provide them with a sense of belonging and community.
From an analytic and post-enlightenment perspective, the phenomenon of “incoherent economics” and “financial populism” could be seen as a regression away from progress and reason. Many would consider this an undesirable future, as it would represent a departure from the values of critical thinking and evidence-based decision-making that have been central to the development of modern society.
To stymie financial populism, it will be necessary to take a multifaceted approach that involves a combination of regulatory, educational, and cultural measures such as:
The collective public goods problem of “incoherent economics” and “financial populism” may be challenging to stymie; however, it is vital to address this challenge to protect the integrity and stability of financial markets, ensure the supremacy of the US dollar, and to foster democratic life based on progress and reason.
In an increasingly complex world with competing spheres of truth, the use of reason is essential in cutting through incoherent narratives and making informed and rational decisions. As the famous economist Charles Mackay once wrote, “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”