Narrative Economics

April 7, 2020

Originally published as a Twitter thread, here is my high level reading/summary of  @RobertJShiller’s book: “Narrative Economics” 👇

Narrative economics is the study of the viral spread of popular narratives that affect economic behavior. The book explores historical examples of how stories go viral, referencing epidemiology to explain why contagious narratives can become epidemics and move markets.

What is an economic narrative?

  • a contagious story that affects economic decision-making
  • spreads virally p2p
  • often aided by celebrity/human interest and/or recursion
  • reminds people of facts they might’ve forgotten
  • offers an explanation of how the economy/world works

The book gives many examples of economic narratives, but one I think is particularly well-documented and interesting is the constellation of narratives in Bitcoin.

What are the Bitcoin narratives?  

A constellation of stories about:

  • anarchist sentiment & human interest (Satoshi)
  • individual economic empowerment
  • software eating the world (@pmarca)
  • getting rich on the cutting edge
  • membership in an autonomous economy


Let’s unpack…

Bitcoin’s affiliation with anarchy is intertwined with a human interest story about its pseudonymous creator, Satoshi Nakamoto, who remained cloaked to avoid scrutiny by world governments.

Satoshi’s very first transaction on the Bitcoin blockchain embedded the London Times headline: “Chancellor on brink of second bailout for banks.” This signaled the risks of governmental abuse of power to reward the rich and powerful.

This made Bitcoin’s early narrative not only anti-establishment but also intertwined with individual economic empowerment. Outsiders benefited from BTC’s first major price gains in 2011, a time when economic inequality advanced rapidly and the Occupy Movement was birthed.

This dovetailed with “software eating the world” or the story of computers playing a greater role in people’s lives. Bitcoin offers a way to benefit from the rise of computers — to participate in history, even if only superficially (without having to master computer science).

Then came the stories of how investors got rich simply by being on the cutting edge of “what’s next.” This is the lure of VC and startups in general, and it is reinforced by repetition of founder and early investor glory stories.

With Bitcoin, anyone could participate in cutting-edge wealth creation, even if they don’t understand how it works. Remember the guy who sold a pizza for BTC who’s now a billionaire? Participation by Regular Joes multiplies the repetition of glory stories on the cutting edge.

Then there is the narrative of BTC as membership in a global, autonomous economy, free of the perennial problems of government incompetence and corruption. Both technically and psychologically, Bitcoin offers an escape hatch from increasing distrust in traditional institutions.

One other story I’ll add is the narrative around fixed supply: the sacred 21M. The fixed supply narrative is reinforced by the “money printer go brrrr” narrative. And also by the recurring halvening (the pre-scheduled decrease in the supply that can be mined into circulation).

In general, economic narratives have a number of variables that determine their success and impact: Speed is one. Narratives can permeate culture and impact economies quickly or slowly, but what matters is the rate of contagion vs. the rate of recovery (debunking the narrative).

Scale is also a variable. Major economic events can be tipped by small ripples in popular discourse, each of which forms a constellation of intertwined narratives that make waves over time. Bitcoin is a good example of the constellation effect.

There are many more variables and tons of good examples in the book.  My takeaway is that predicting economic events can depend heavily on the epidemiology of narratives. Viral stories matter. Duh.

A complementary read is @ystrickler‘s recent book “This Could Be Our Future” which details how the narrative of “Financial Maximization” took hold and has accelerated since the 1970s. He also offers a framework for building new economic narratives to improve our future.