The awarding of the to Robert Shiller, Eugene Fama and Lars Peter Hansen raised eyebrows in corners of academia. There was no question as to whether the scholars were worthy of the award. But the decision to jointly recognise two economists associated with of the financial world ¨C Fama and Shiller ¨C seemed anomalous for a prize that often celebrates . Indeed, Shiller¡¯s seminal work in behavioural finance was a direct reaction against the growing hegemony of the rational, efficient markets view of Fama.

In the late 1970s and early 1980s, Fama was in the ascendant and the evidence seemed irrefutable. By reviewing how prices reacted quickly to news (so-called event studies) and how difficult it was for money managers to generate returns beyond those provided by the market, he seemed to make it clear that markets were incorporating available information quickly and were, therefore, efficient ¨C or roughly so. Shiller overturned this dominant view with a deft sleight of hand: he pivoted from backward-looking tests to forward-looking tests and showed there was ¡°excessive volatility¡±: prices were moving far too much today, given the actual amount that cash flows and prices of risk actually changed over time.

In short, Shiller succeeded by changing the narrative ¨C he changed the rules of the game for measuring market efficiency and, in the process, gave birth to the field of behavioural finance. Today¡¯s financial world remains a battleground between the duelling Fama and Shiller narratives. More and more capital is allocated to index funds that manifest the logic of Fama and more and more people are convinced that markets are highly imperfect aggregators of information that are prone to bouts of what Shiller memorably called ¡°¡±.

Indeed, these duelling narratives are just that and little more. As John Campbell, Shiller¡¯s long-time collaborator, at the time of the 2013 prize, ¡°while Fama and Shiller disagree about the interpretation of these findings, they do not disagree about the facts¡±. The same facts are interpreted by Shiller supporters as mispricing and irrationality, while Fama fundamentalists just see risk factors that have yet to be named. The debate in the discipline of finance today is not about the facts but the interpretation to put on to those facts.

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For Shiller, the lessons of his intellectual trajectory and of behavioural finance are clear ¨C we need to pay much more attention to the creation and dissemination of stories and the way these stories organise our thinking and, in turn, influence economic outcomes. In , he provides the fruit of his ¡°adventure in the discovery of ¡± by taking the reader on a wonderfully enjoyable ride through the frontiers of brain science, epidemiology, sociology and anthropology to emphasise the dominance of narratives ¨C and to call on economists to understand the world they model as being influenced by shifting narratives.

Shiller¡¯s book is filled with bite-sized nuggets (with 19 chapters each further divided into?10 or 12 sections) that are easily digested and provide illuminating parallels between the virality of diseases and fads and bubbles in asset prices. Graphs show the ¡°disease¡± of bitcoin hysteria spreading quickly and then going on to die quickly ¨C just like other epidemics.

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Shiller hopes to set out the foundations of narrative economics through these comparisons and several propositions. These include: ¡°narrative constellations have more impact than any one narrative¡±; ¡°truth is not enough to stop false narratives¡±; and ¡°economic narratives thrive on human interest, identity and patriotism¡±. These lessons are elaborated through various economic phenomena that are best understood by Shiller as narratives ¨C from wage-price spirals to bimetallism to conspicuous consumption to the fad for cryptocurrencies. The book ends with an attempt to adapt epidemiological models to economic phenomena and a call for more use of data on beliefs. E.O. Wilson and C.P. Snow would be proud.

But Shiller goes further than just suggesting that some economic phenomena may be best understood by using narratives and emphasising shifting beliefs. And his effort to create a form of narrative economics goes to the core of what economics is becoming. He suggests that economic theories themselves ¨C including those about efficient markets and the workhorse ¨C are just narratives that spread for often spurious reasons having little to do with their actual probative value. In this very meta turn, the economic discipline itself becomes a domain where economic theories are simply competing narratives that filter through journals and the profession because of political and economic forces and where the scientific search for the truth is only a tertiary consideration. (Behavioural finance, unsurprisingly, is never subject to a similar characterisation. The current fad for nudges that will supposedly solve the world¡¯s problems, and indeed the relabelling of a standard emphasis on incentives as ¡°behavioural¡± economics, is never considered as a fashion in the same way as efficient markets theory.)

While Shiller¡¯s encouragement to the profession to adopt an appreciation of narratives to understand economic phenomena is helpful, characterising the debate between alternative economic theories as a battle of narratives risks belittling the status of economics as a scientific endeavour with a unified worldview. The ascendancy of economics over the past 70 years has developed, as , out of shared beliefs in the importance of rationality, trade-offs, incentives and equilibria. Shiller¡¯s book is a reminder of what is to be gained and lost as economics leaves behind that historic consensus. By moving away from rationality and emphasising belief systems that often deviate from rationality, equilibrium and objective reality, economics is becoming more friendly and more similar to other disciplines ¨C but it may also become considerably less compelling and distinctive.

At its worst, economics could become like the field within academia that is not emphasised by Shiller but seems most relevant for his argument on the primacy of narrative: literary theory. In Shiller¡¯s emphasis on subjective beliefs and the devolution of finance into a field of conflicting interpretations, one is reminded of the Nietzschean view that ¡°.¡± That perspectivism has led literary theory away from underlying reality and resulted in a splintered discipline that is far removed from public debates. Do we need more of that kind of perspectivism in economics today? Or do we need an ever-sharper focus on our shared responses to incentives and the aggregation of those responses in ever more dynamic markets? By expanding the boundaries of economics, do we not risk depriving the world of what the discipline does uniquely well?

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Shiller¡¯s book is a spectacular effort at unifying distinct fields and encouraging the profession to be ever more capacious in its approach to phenomena and methodology. I would have only wanted slightly more consideration of what might be lost as the emphasis on narratives and irrationality inevitably displaces historically rich sources of knowledge and inquiry. Perhaps my narrative of what the discipline needs is just different from his.

Mihir Desai, a professor at Harvard Business School and Harvard Law School, is the author of The Wisdom of Finance: How the Humanities Can Illuminate and Improve Finance (2017) and How Finance Works: The HBR Guide to Thinking Smart About the Numbers (2019).

Narrative Economics: How Stories Go Viral and Drive Major Economic Events
By Robert J. Shiller
Princeton University Press, 384pp, ?20.00
ISBN 9780691182292
Published 1 October 2019

The author

Robert J. Shiller, Sterling professor of economics at Yale University, and professor of finance at the Yale School of Management, was born in Detroit, Michigan and studied at Kalamazoo College, a small liberal arts college, and the University of Michigan before going on to a PhD in economics at the Massachusetts Institute of Technology. He held faculty positions at both the University of Pennsylvania and the University of Minnesota but has been based at Yale since 1982.

Although he started his career as an econometrician, Shiller soon began to range more widely and has made major contributions to the study of behavioural economics, financial markets and innovation, real estate, public opinion and moral judgements about markets. As he explained in an autobiographical sketch he wrote when he shared the Nobel Prize in 2013, he came to believe that ¡°econometric methods are best augmented with other approaches, if I am really to be useful in adding to an understanding that allows for better economic policy and practice¡­I have been more willing than most to entertain inventions or ideas that may seem eccentric. I have also tended to be relatively eclectic, borrowing more from other social sciences, violating economics profession norms.¡±

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A keen student journalist even as an undergraduate, Shiller is a regular columnist for The New York Times. Alongside more specialist texts such as Market Volatility (1989), he has written a number of trade books aimed at a wide readership, including Irrational Exuberance (2000), The New Financial Order: Risk in the 21st Century (2003), Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism (with George A. Akerlof, 2009), Finance and the Good Society (2012) and Phishing for Phools: The Economics of Manipulation and Deception (also with Akerlof, 2015).

Matthew Reisz