Stories and narratives have always been an integral part of human culture, and play a significant role in shaping our beliefs, attitudes, and behaviours. Narrative economics, a heterodox approach to economics, propounds that the same is true for the economy. This strand of economic thought, presented by Nobel Laureate Dr Robert Shiller, suggests that people tend to follow popular beliefs and stories in society in the face of uncertainty. These beliefs might lead them to overlook facts while making economic decisions, which in turn create peaks and troughs in economic activity.
For instance, the Adani-Hindenburg row is a significant story in the financial world. Most do not accurately know if the allegations made by the Hindenburg report are true. However, the narratives surrounding the report moulded people’s perceptions about the truth. The different stories that emerged and the lack of accurate information around the subject hugely impacted the company's stock price, triggering a loss of more than $110 billion to the conglomerate and had the potential to shape investor confidence in the Indian stock market.
In the classical models of rational choice, each individual makes decisions independently, thereby maximising his or her utility. This strand of economic thought was too disconnected from the financial world, and the failure of economics to explain the 2008 financial crisis has challenged their practical effectiveness. Traditional economic models, while important as a starting place, must be open to insights gained from other subject areas, as the economic lives of people are not isolated from their social lives. Shiller's contribution helped fill this vacuum in economic theory by positioning the role of emotions and psychology as crucial in shaping economic beliefs and behaviours. In today's interconnected world, communication networks have the ability to quickly disseminate information and shape popular perceptions on a massive scale. With the increasing recognition of the impact of narratives on human behaviour and decision making, the importance of understanding the role of narratives in the economy has become increasingly clear.
Behavioural economics sets the pretext for the emergence of narrative economics. According to the behavioural explanation of economic decision making, human beings tend to latch on to one piece of information more strongly than others - a bias termed the anchoring bias. We tend to anchor our entire decision based on one fact or piece of information, which usually becomes the major narrative that circulates in society. The famous Apple vs Android debate is a great example of this bias. Most recent versions of Apple and Android phones have similar characteristics, with pros and cons in different aspects. However, consumers have a ‘neurological connectivity’ to brands, and their connection with Apple phones is greater than that with Android phones. As the loyal consumer base of Apple vouched for its quality, the narrative that Apple products are better than Android became much more prominent. Using the anchoring heuristic, regular consumers use this narrative to make their decision to choose an iPhone and phase out other complicated technical information. And just like that, narratives influence our economic decision making, because it is easier for us to hop on the bandwagon and go with the narrative than examine each and every feature of a good or its substitutes etc, before making a decision.
The influence of narratives becomes imperative in framing economic policies. Policymakers can use narratives in explaining the rationale behind policy choices, present the expected outcomes, and garner public support. By constructing compelling narratives, policymakers can shape public perception, generate empathy, and facilitate the understanding and acceptance of welfare-increasing economic policies. Recent studies aimed to understand the impact of narratives on donations to Save the Children where participants were given the opportunity to contribute $5. They were divided into two groups: one received factual information about poverty in Sub-Saharan Africa (statistical victim), while the other heard the story of an impoverished girl from Mali (identifiable victim). Contributions from the identifiable victim group averaged $2.83, whereas the statistical victim group donated $1.17. These findings suggest that an identifiable victim narrative leads to higher contributions, highlighting the influence of narratives on supporting charitable causes.
Understanding narratives is crucial for achieving social and economic justice as narratives shape public perception, policy decisions, and societal attitudes. This can be observed in the perception of the reservation system in India, which is a complex and sensitive policy that has generated diverse narratives. Understanding these conflicting narratives is important to address criticisms, refine the policy, and ensure its fairness and efficacy.
Narratives highlighting the historical discrimination faced by marginalised communities contribute to the recognition of the need for affirmative action and shed light on the experiences of disadvantaged groups and create empathy, fostering support for the reservation system. However, narratives challenging the reservation system focus on perceived unfairness and further perpetuation of caste divides. These narratives may question the policy's effectiveness, argue for merit-based opportunities, or express concerns about the perpetuation of caste-based divisions.
Narrative economics provides a unique perspective on the importance of narratives in shaping economic behaviour and policy outcomes. It recognizes the power of narratives in influencing public opinion, policy framing, and mobilising support or opposition. By analysing narratives, policymakers can engage with stakeholders, address concerns, and develop informed policies. This line of reasoning can be applied to various economic and social issues, such as income inequality, poverty alleviation, climate change, or healthcare reform. Narrative economics provides a valuable framework for analysing narratives, promoting empathy, and fostering dialogue, ultimately contributing to more informed and equitable policy-making.
Twinkle Adhikari
