Waste time on Facebook and Twitter, and become a better investor
By Michael Brush, MarketWatch
Economist Robert Shiller says you can glean insights from social groups
If you find yourself wasting time on Facebook and Twitter, don't feel guilty.
You may be absorbing a lot more about economic trends, and by extension investment insights, than you think. It turns out there's a lot of predictive value in the viral stories on social media.
That's the view of one of the preeminent thinkers about markets and the economy of our time, Yale University professor and Nobel Prize winner Robert Shiller.
Here's what he means. As every college student who ever plowed through a Paul Samuelson textbook knows, economists like to believe that everyone logically pursues their "rational self-interest."
Pieces of the puzzle
But thinking about people in this way is too limited, and it means economists are missing a big piece of the puzzle, Shiller says. That's because when deciding about whether to buy a new car or how to invest, people are often swayed by the stories, jokes, urban legends and conspiracy theories they hear all around them.
Collectively, these stories and tales make up the "narrative" that most people take in every day.
"Economists don't appreciate the power of narrative," Shiller says. "People are often influenced by stories that spread virally. Things change in the economy because of narratives."
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That makes a lot of sense, as much as we like to think of ourselves as rational beings. After all, from the early days of sitting around fires or drawing on walls inside caves, humans have been wired to tune in to storytelling, especially when stories have an emotional angle. It can be a way to learn about the world and how to behave.
That hasn't changed. So it stands to reason that stories and memes affect the economy. Shiller is writing a book on this intersection of viral memes and the economy, a theme he calls "narrative economics." I recently spoke with him about this theme, and I caught a presentation of his on it one evening earlier this year at a New York University.
Tracking viral stories
To show how narrative economics might be so powerful that they can even help cause a depression, Shiller takes a deep dive into history. Using an academic research technique called content analysis, he tracks narratives via word counts in newspapers and books using databases like ProQuest News and Newspapers, and Ngrams from Alphabet (GOOGL) (GOOGL).
The 1920-21 depression, the sharpest ever in recorded U.S. economic history, offers a good case study of how viral stories may help cause a train wreck. Esteemed economist Milton Friedman and other historians blame this depression on the Federal Reserve. It raised interest rates sharply in January 1920 to try to cool the economy.
The depression that followed was a doozy. Consumer prices collapsed 16%, and business prices fell 45%. Why did demand shrink so much? All because of a rate hike by a newfangled government institution that was set up only a few years earlier? Well, maybe it wasn't all the Fed's fault, Shiller says.
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He rounds up other culprits. For example, one popular Facebook-worthy meme at the time preached that greedy and evil "profiteers" were jacking up prices after the war to take advantage of everyone else, including poor, returning war heroes. The word "profiteer," a relatively new word at the time, shot up in usage in newspapers. Politicians naturally jumped on board. One senator offered a sound bite urging consumers to "boycott the profit hogs." The bottom line here is that the 1920-21 recession may have been caused, in part, by a consumer boycott against supposed profiteers.
Other viral stories contributed. One held that prices should naturally fall sharply and return to pre-war levels. So people held off on buying to get better deals. There was no rational reason to think this way. But like a typical Facebook (FB) newsfeed meme, it sounded as if it made sense. So why not believe it, especially since it promise a benefit?
In the background, viral stories about the flu epidemic, race riots, a Communist "red scare" in the U.S. and even an oil shock might have frightened people into closing their wallets. Scary narratives soften optimism. Shiller cites research finding that people who live near earthquakes are more likely to think the stock market will crash.
Here come the robots
OK, but what about now? The good news for investors is that several key narratives appear to support more stock gains and economic strength ahead.
Here's a counter-intuitive one. A popular viral story now is that robots and automation will take over lots of jobs. This sounds negative. But it may help explain the "Trump rally" in stocks and housing-market strength, Shiller says. People who are frightened about losing their jobs may be more likely to invest in the markets and homes, rather than spend money frivolously.
No analysis of narrative economics would be complete without a discussion of President Donald Trump, a master at spinning narratives. Here the news is good and bad for investors, with more good than bad, at least so far.
Trump narratives help the economy and stocks in two fairly obvious ways. Many in business view Trump as a kindred spirit who's not going to do anything to hurt their prospects. To the extent that people look at Trump's personal story as a script for their own lives, they might spend more freely and take on more risk, Shiller says.
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On the policy level, Trump appears business-friendly. He seems to believe in less regulation, lower taxes and smaller government to help the private sector. Sure, there's been a dearth of actual legislation. But the executive branch has a lot of power over the federal agencies that command regulation. Here businesses testify to rollbacks, and the removal of the risk of "regulatory ambush."
The upshot: Since Trump was elected, business confidence at smaller companies has risen to levels not seen in over a decade. This is important, because small businesses create most of the jobs. But business confidence has shot up overall, according to Fed surveys, and this may create its own feedback loop. If businesses invest more, this would create more growth and boost confidence and spending even more. We are seeing signs that this feedback loop is at work in the better economic numbers in the past two quarters.
Trump is a lot like Calvin Coolidge, the president during much of the 1920s, Shiller says. Coolidge also stood for lower taxes and smaller government. And that similarity might not be a bad thing for investors.
"The Coolidge prosperity lasted eight years. We are kind of in that spirit," Shiller says.
Of course, Trump has spawned many negative narratives fueled by those who viscerally despise him. If their narratives prevail, it could ultimately hurt confidence and curtail growth. This is one of the big wild cards.
"We have a new president, and we are still experimenting with what he is doing," Shiller says.
The experiment could go horribly wrong in a way that would be bad for stocks, since it would take complacent inventors by surprise. Which brings us to another troubling economic narrative, the "don't worry, be happy" market meme.
Volatility is the lowest it has been since 1871.
"We're just not that worried that other investors will pull out," Shiller says. That may sound comforting. But the problem, Shiller says, is that right before 10 of the 13 bear markets since 1871 volatility was eerily low -- just as it is now.
Click here (http://cowles.yale.edu/sites/default/files/files/pub/d20/d2069.pdf) for more from Shiller on narrative economics.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush is a Manhattan-based financial writer who publishes the stock newsletter, Brush Up on Stocks (http://www.uponstocks.com/). Brush has covered business for the New York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program.
-Michael Brush; 415-439-6400; AskNewswires@dowjones.com
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