In his own narrative: An interview with Nobel Laureate Robert Shiller

It is not everyday that two master students interview a Nobel Prize Laureate in Economics. Understandably, we were nervous, over prepared, and excited. We had done our homework, but we did not expect to be interviewing the Laureate in what can only be described as TV newsroom. The cameras, the lights, the equipment, and only five people in the room. We had no idea TSE even had such a room. We hope the reader will enjoy the interview as much as us two did when preparing and conducting it.

Robert Shiller does not need an introduction. A simple Google search would suffice to show how vast and influential his work has been. Professor Shiller won the Nobel Prize in Economics in 2013, is the current Sterling Professor in Economics at Yale University, and stands as one of the most cited and influential economists by IDEAS’s ranking. He finished his undergraduate studies at the University of Michigan in 1967 and obtained his Ph.D. form the Massachusetts Institute of Technology (MIT) in 1972 under the guidance of Franco Modigliani. He famously opposed the common belief that markets aggregated information efficiently, going against the predominant view in financial economics at the time and challenging none other than University of Chicago’s Eugene Fama—a heavyweight of the field and with whom he later shared the Nobel Prize along with Lars Peter Hansen.

His latest research has focused around how narrative shapes decision-making and consequently the economy. We met with Professor Shiller after his IAST Distinguished Lecture to talk about the influence of narrative on decision-making, the rise of Donald Trump in the United States, and Eugene Fama. The following is an edited version of that talk.

*This interview was conducted alongside James Nash, who works as a freelance journalist for the TSE Mag and IAST Connect. We hope that this will be the first of many more collaborations between TSE’s magazines.

1. You have written bestselling books that show how our economies are driven by irrational behaviour and what Keynes called “animal spirits”. Could you talk a little about why this is such an important theme to you?

It’s very important to try to figure out what is driving the economy, what’s changing, and what’s stable. The ability to forecast economic fluctuations, for example, depends on your understanding of what’s behind it. Economists have found it difficult to isolate what is behind all these movements we see. And, I think, the reason why is that it is substantially psychological and our department is not really well attuned towards understanding psychological phenomena. I wrote a book called Irrational Exuberance, which really focused on exactly these psychological drivers that hit the economy. And I think that economists’ failures to, in many cases, forecast major events, is because many of them ignore psychology.

2. You encourage academics to work across disciplines, such as this marriage of economics and psychology. Do you think that there should be a Nobel Prize for interdisciplinary work?

The Nobel Prizes are awarded to specific fields: chemistry, physics, medicine, economics and there is a peace prize. That was a decision made long ago. Unfortunately, it compartmentalises research a bit. I think that really creative research often—I mean generally—has some interdisciplinary dimension. So, I try to be more interdisciplinary and I try to encourage people to do that.

3. Last night, you focused your talk on the role of narrative in financial decision-making. How does our fondness for stories both contribute to and distort the understanding of global events such as financial crises?

Traditional economics—I should say traditional for the last half century—describes people as responding to facts, exclusively, and acting in a rational behaviour with regard to the fact. The problem is that there are limits to the truth of that view of the world. People respond often with emotions and with what seems to be a makeshift solution to vaguely stated or ambiguous economic problem. I mean, for example, we talk about a recession, but what is a recession? It is when people stop spending: when they cancel their vacation, or they don’t buy a new home or something like that. But why do they do that? Is it careful calculation? Probably not. It’s probably their sense of worries, or fears that might be hiding at some point, or some sense of what the thing to do is, what are other people doing. So we can’t assume that behaviour is really well described by optimization, as has been the norm in economic departments.

4. In that context, what makes one narrative more powerful than another? This is sort of a double-headed question: Why are stories important? For example, you’ve written about their impact on confidence.

Humans are very story oriented. This is a human universal. It is true in every human culture. Stories, especially human-interest stories, motivate them. If I recite some statistics to you, you won’t be so motivated as if I read a story about someone who’s made a lot of money and somehow, or a tragedy of some sort. These things get you thinking and acting. In describing the economy, we want to describe the actions that people take, actually do and that requires some appreciation. I think, of narratives, because you don’t take an action until you’re actually motivated. [You] actually do it when it’s personal: “I want to do this,” or “I’m not going to do something.” And these tend to be—these decisions—tend to be connected to stories about what other people are doing, or human interests.

5. In your words last night, “stories are like epidemics” and you have used epidemiological models to explain how they spread in a population. And like in any epidemic there are certain individuals that are more contagious than others. Is there such thing as a superspreader of a narrative, and if so, how can one identify it?

The term superspreader in medicine dates back to over a hundred years ago and the famous case was “Typhoid Mary”, a woman who caught typhoid. And then, for some reason, she just spread it and spread it and spread it. She was a sick woman—literally sick. And they wondered why did she continue to be contagious when she should have stopped. That’s an interesting question for medicine. But I think we have something like superspreaders in the realm of ideas. [We have] People who are good storytellers and have a sense of motion and stories. And so these people end up having extraordinary influence over the public opinion. It could be use for good, or you know, we have to hope that it is used for good. It is something, a fact of our life, to understand that there are
superspreaders that can really change the direction of history.

6. A narrative of panic inspired by the possibility of leaving the EU – promoted, for example, by the Bank of England – preceded the months before the EU Referendum. Should the Bank of England, as well as other institutions and experts, have taken their roles as narrators more cautiously prior to the vote?

I think that people really didn’t believe Britain would exit. It was a surprise. And so maybe people didn’t do enough to combat that. Personally, I think it’s a tragedy. The European Union has many advantages for everyone and it’s a community and the sense of community was damaged by this. Unfortunately, it was also a campaign for Brexit that exaggerated fears about immigrants or [fears about] domination by Europe. So it was a bit of a misinformation campaign. I’m hopeful, though, that Europe and UK will stay united in some spiritual sense despite this.

7. From Brexit to the current U.S. presidential race, disruptive political narratives are playing an important role. We have seen the figure of Donald Trump, for example, running on a political platform mostly based on his own narrative rather than on facts. What does the rise of Trump as a serious contender for the White House say about the importance of narrative on elections or on markets overall?

The Donald Trump phenomenon is a beautiful example of the importance of narrative. In the primaries leading up to the nomination of him as the Republican Party candidate, there were many other candidates who looked perfectly plausible—in fact, more plausible in my opinion. And they just faded away. It was his showmanship and the stories that he generated. The narratives that would be spread then by word of mouth about Trump that powerfully swayed voters in the primaries and continues to do so today. The problem is that you cannot argue against a narrative with statistics. So if Donald Trump tells a story about Mexican immigrants committing crimes in America, you might try countering it by saying that actually their crime rate is actually no higher. That’s the statistic. But Trump just ignores that and continues to tell stories as if they were a danger. In order to counter that you have to form a narrative, another story, that outperforms his narrative. That’s a challenge for Hillary Clinton and she’s trying to do that. I think he’s a tough man to beat on narrative. He has a sense of story quality and a sense on how to do it.

8. Now let’s talk about the future of the financial markets. In particular, how do you think that the emergence of FinTech firms (financial firms relying in technological innovation), with their optimistic and easy-going narrative, will have an impact on consumer’s investment decisions?

I feel positive about financial innovation. It has a very important role in our society because it brings a real technology to solving real problems. The fundamental problems that help make a country prosperous and have shared prosperity are problems of risk and incentivisation. We can diminish the impact of economic risks if we have plans to share the risks and we can help incentivize people if people are given a share in the benefits or profits that an enterprise makes. So I am sounding traditional as a finance professor, but I think that finance needs to also take into account human behaviour, incorporate that into a broader vision for finance, and it will make for a better world.

9. What was your reading of the IAST story? What would be your narrative of your visit to Toulouse?

Well, my visit to Toulouse involved me with speaking to people with many different perspectives. And I found it very instructive for me. You have some very smart people here working in different traditions and coming together. At least I saw them coming together. And I think that is extremely important for research. When research is narrowly defined, then it can become repetitive. The interdisciplinary cross-fertilization is, I believe, extremely important. And I saw it happening here.

10. Professor Shiller, for the final and million dollar question: who’s right, Eugene Fama or yourself?

[Laughs] Eugene Fama and I won the Nobel Prize on the same year but we have often been described as opposites. I actually am a big admirer of Eugene Fama. And I do not think he’s opposite. He’s not opposite me. I think we agree on basic facts. And I think, though, that there’s a different rhetoric. I think we belong to different parties. I don’t actually belong to a party, and maybe he doesn’t either. But he has a different way of summarizing and he has a different policy prescription. I’m sure he’s less sympathetic to government intervention. But these are judgment matters. I think it’s ok. I think people in disciplines have opposite views, but as long as they are respectful of the facts, their research is useful. And so I have used Eugene Fama’s research and I’ve read it carefully and I think it’s basically right if you can get away from the politics.

by José M. Álvarez and Marina Sánchez del Villar