Narrative Economics
Stories shape our economic choices, guiding us in deciding where and how to invest.
Definition
Narrative economics explores how emotionally charged human stories spread and influence economic trends or major events.
It sheds light on the viral nature of narratives that shape our economic experiences, transforming our understanding of events like wars, unemployment, and inequality.
Why Use It
Economic narratives, tied to behavioural biases and mental models like the representativeness heuristic and framing effect, impact investment decisions. Narratives, such as beliefs in unstoppable tech stocks or fail-proof firms, can sway choices.
The affect heuristic connects emotions to economic stories, amplifying perceived risks during events like a stock market crash. Constructed narratives, influenced by indicators and expert commentary, strongly impact investment choices through biases.
Recognizing this influence is crucial. Aligning decisions with long-term financial goals helps navigate the influence of narratives.
When to Use It
Widespread stories, whether accurate or not, can influence markets and shape economic decisions.
Beliefs in tech stocks always rising, housing prices never falling, or certain companies being failure-proof impact choices in investing, spending, and saving.
These narratives circulate through word of mouth, news media, and social media, playing a crucial role in driving the economy.
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