Speaker 1: This is Master's in Business with Barry Riddholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: What can I say? Robert Schiller is a legend professor
Speaker 1: at Yale, Nobel laureate, author of ten books, one of
Speaker 1: the people who helped drive behavioral economics to its position
Speaker 1: of influence today. His new book Narrative Economics tells the
Speaker 1: fascinating story of how stories drive markets and economies, and
Speaker 1: why some stories go viral and others don't. It's quite fascinating.
Speaker 1: I could babble for all this time about how fascinating
Speaker 1: it was to chat with him, But rather than me
Speaker 1: do that, let me just say, with no further ado,
Speaker 1: my conversation with Professor Robert Schiller. This is Master's in
Speaker 1: Business with Barry Ridholts on Bloomberg Radio. My extra special
Speaker 1: guest this week is Robert Schiller. He is a professor
Speaker 1: of economics at Yale University. He won the Nobel Prize
Speaker 1: for his empirical analysis of asset prices in He is
Speaker 1: perhaps best known for the cyclically adjusted pe ratio, the
Speaker 1: Case Shiller Housing Index, all sorts of works in behavioral
Speaker 1: economics as well as the author of numerous books, most
Speaker 1: recently Narrative Economics, How stories go viral and drive major
Speaker 1: economic events. Bob Schiller, Welcome to Bloomberg. Very it's a pleasure.
Speaker 1: So it's funny that you, of all people, wrote this
Speaker 1: book when when I think of narratives in the context
Speaker 1: of behavioral economics, I tend to think of the stories
Speaker 1: that investors tell themselves to either rationalize buying a company
Speaker 1: or not selling something that didn't work out. And you
Speaker 1: seem to have taken this to a different direct. Your
Speaker 1: thesis is narratives has a very big impact on markets
Speaker 1: and the economy. Is that different from your prior work
Speaker 1: or is this consistent? I wrote a book in two
Speaker 1: thousand called Irrational Exuberance, which focused on well, I didn't
Speaker 1: use the word narrative a lot, but it was the
Speaker 1: effect of narratives on the stock market. I've decided it's
Speaker 1: bigger than that. It extends to the whole economy, and
Speaker 1: a lot of people know about the importance of narratives,
Speaker 1: but economists mostly don't. So it's it's trying to bring
Speaker 1: the study of narratives into economics because I think it
Speaker 1: matters for the big events that we we see And
Speaker 1: in the book you describe how other fields use narratives
Speaker 1: pretty robustly as a way of either explaining what happened
Speaker 1: or why something happened. Why why has economics been so
Speaker 1: behind the times with this, Well, I don't exactly know
Speaker 1: why it is so different. It has something to do
Speaker 1: with a a spree decor and a department of economics
Speaker 1: and finance that is built around this maximizing framework that
Speaker 1: that people we don't describe their behavior, we describe their
Speaker 1: objectives and assume that they're maximizing. They're expected success with
Speaker 1: these objectives. And there's a reason for that in economics
Speaker 1: that often people know something that we uh that that
Speaker 1: is guiding their actions, and we better figure out what
Speaker 1: that is. And so I think there's that is an
Speaker 1: interesting direction that economics has taken. And uh it leads
Speaker 1: us to things like the optimality of market solutions. UH.
Speaker 1: And so it's become it's great, but it's also become
Speaker 1: something of a religion. UH. And it has blocked people
Speaker 1: seeing the obvious. So homo economists people being profit maximizers.
Speaker 1: I assume you're not really a big believer that that
Speaker 1: is the dominant narrative all the time. It's not the
Speaker 1: dominant narrative all the time. And human mind is very capricious,
Speaker 1: and it jumps from narrative to narrative, and it's socially determined.
Speaker 1: It's not just narratives I tell myself. It's important that
Speaker 1: I tell them to others and they can spread virally.
Speaker 1: So that leads to the question about social media. How
Speaker 1: important is the modern era of fill in the blank, Facebook, Twitter, Instagram,
Speaker 1: whatever to economic and market stories going viral? Well, it
Speaker 1: changes this the scenario, but we did have stories going
Speaker 1: viral thousands of years ago through word of mouth, the
Speaker 1: same way viruses go viral from person to person with
Speaker 1: no intermediary. That's how you catch a disease. Usually you
Speaker 1: meet someone and it spreads from one person to another.
Speaker 1: So it's capable of producing big epidemics. Now it might
Speaker 1: beat them up. It also allows more polarity. It allows
Speaker 1: people to find similarly oriented people and so you might
Speaker 1: see more diversity and views that come about because of
Speaker 1: So I think we have to study the effect of
Speaker 1: social media and other internet programs. But fundamentally, narratives have
Speaker 1: been important in driving the economy. Going back Middllennia. All right,
Speaker 1: so let's talk about some big events, and I want
Speaker 1: to get your feedback as to how various memes impacted them.
Speaker 1: There seem to have been a number of narratives around
Speaker 1: the Great Recession and the credit crisis. The one that
Speaker 1: I remember distinctly home prices never go down. It turned
Speaker 1: out not to be the case. How important were narrative
Speaker 1: economics to the build up to the crisis as well
Speaker 1: as the subsequent collapse. I think home prices that was
Speaker 1: a major cause of the crisis, but we might have
Speaker 1: still had a recession, but it wouldn't have been so
Speaker 1: bad without that. I want to know what I'm interested
Speaker 1: in the big events, and often it's contributing factors that
Speaker 1: make them big. So the idea that homes are a
Speaker 1: great investment, it wasn't so much that people were saying
Speaker 1: home prices never go down. It's that they didn't pay
Speaker 1: any attention to the thought that they might go down.
Speaker 1: I remember I was on stage and in a event
Speaker 1: around two thousand five, two thousand six, and I asked
Speaker 1: a businessman who was on the panel with me, what
Speaker 1: if home piss go down in front of an audience
Speaker 1: and He seemed perplexed. But what are you talking about.
Speaker 1: It's not like he was just saying that they never
Speaker 1: go down. But he said they have. They've never gone down,
Speaker 1: not since of the Great Depression. And I said, well,
Speaker 1: what if that happens again? And he was kind of
Speaker 1: making me look crazy. He couldn't even conceive of the
Speaker 1: idea that prices might fall. Well, when you haven't seen
Speaker 1: them fall substantially since the Great Depression, maybe that's forgivable.
Speaker 1: It didn't. We see a decrease in prices late late
Speaker 1: eighties after the eighties seven crash, and rates had gone up.
Speaker 1: So it's not like it's two generations ago. It was
Speaker 1: thirty years ago. If you're a fifty something, you're a
Speaker 1: business person, that should be in Europe. But it's not
Speaker 1: in the narrative. It's not being talked about. We can
Speaker 1: forget things like, for example, the stock market crash of seven.
Speaker 1: That's a little over thirty years ago. But my students
Speaker 1: don't know anything but never heard of it. What about
Speaker 1: the dot com crash or the O eight oh nine collapse.
Speaker 1: It's got to be a little fresh now. Yeah, well,
Speaker 1: the dot com crash was in the future, in the
Speaker 1: event that I'm describing. But people know about things that
Speaker 1: are that are popular, and the crash is the one
Speaker 1: that everyone remembers. Other ones more recently, how about the
Speaker 1: six crash or yeah, well it was like one day
Speaker 1: there was a six percent drop. Nobody remembers. I mean
Speaker 1: maybe you remember. I don't remember that. That's before my time.
Speaker 1: So let's talk about another big event. Let's let's talk
Speaker 1: about the gold standard. The US for a long time
Speaker 1: was on the gold standard, then we were off. President
Speaker 1: Trump has talked about going back to the gold standard.
Speaker 1: This seems to rise and fall over time. What what
Speaker 1: drives that? Well? I think that what drives narratives is
Speaker 1: a certain creativity that some people have at some moments
Speaker 1: in their lives to invent a story. Uh. And this
Speaker 1: is something that literature department studied economists don't What is it?
Speaker 1: What is it about a story that works? Uh? You know,
Speaker 1: often are I think our attention to ideas is focused
Speaker 1: by the kind of stories that accompany them. Um So
Speaker 1: I thought, for example, and it it there's something about
Speaker 1: visual impact, imagery, something about human interest, something about emotions
Speaker 1: being driven up, uh, something about tie into other stories
Speaker 1: that you already liked uh that the creative art of
Speaker 1: a writer can sometimes surmount and and use and create
Speaker 1: a narrative that will really go viral. It's a difficult
Speaker 1: thing to do. It's it's similar with music. Some music
Speaker 1: goes viral and some doesn't. I think it's it's somewhat random.
Speaker 1: Something gets started and it becomes developed certain associations, and
Speaker 1: then everyone is talking about It has to be right time,
Speaker 1: right place, and just a little bit of luck, uh,
Speaker 1: and maybe requires perfection. So the most the most famous
Speaker 1: listen in the arts, where it's not exactly is sort
Speaker 1: of there. The ballet the Nutcracker. That's the most famous
Speaker 1: ballet in the entire world. It's it's everywhere. But when
Speaker 1: Tchaikovsky first wrote it in it wasn't a big success.
Speaker 1: He had to work at it, uh. And then um,
Speaker 1: it came over to the US and George Ballantine, the
Speaker 1: ballet writer, the ballet director, fixed it, made it into
Speaker 1: a really beautiful ballet, and so it has now gone
Speaker 1: viral and it's we love this ballet. People who don't
Speaker 1: like ballet will go to that one and repeatedly. So
Speaker 1: so there was something about it that that Tchaikovsky had
Speaker 1: an idea. He couldn't quite get it at first, and
Speaker 1: it involved little details that make it somehow work eventually
Speaker 1: be bringing the children. You have to emphasize the children,
Speaker 1: and people love to see children blossoming on stage in
Speaker 1: front of them. So because it's a Christmas themes and
Speaker 1: it's also ties into anything else, and that there's an
Speaker 1: annual prompt to do it, to see it again, so
Speaker 1: a lot of people go every Christmas. Now this isn't
Speaker 1: really an economic narrative. I'm doing a little bit different,
Speaker 1: but it's the same idea that there that the and
Speaker 1: what's so special about that story or any other story?
Speaker 1: Something clicked in and it's just universal. Sorry, by the way,
Speaker 1: have you seen the nutcra I recommend you go see
Speaker 1: it if you haven't. Them. The story you're telling about
Speaker 1: how that when viral reminds me a little bit of
Speaker 1: Derrick Thompson writes for The Atlantic and wrote a book
Speaker 1: How HiT's Happened, and he talks about a number of paintings,
Speaker 1: including all of the Impressionists. It's really a sort of
Speaker 1: fascinating coincidence how a certain group of Impressionists became worldwide
Speaker 1: famous because one of them were collecting other Impressionists work,
Speaker 1: left it in their estate to the French Um, one
Speaker 1: of the French museums, and part of the will was
Speaker 1: it how to be displayed. So suddenly just a group
Speaker 1: of a new style of art that wasn't popular anywhere else,
Speaker 1: and a group of seven or eight artists became worldwide famous.
Speaker 1: Same sort of thing, very serendipitous, very random. This reminds
Speaker 1: me of a book that influenced me a lot years ago.
Speaker 1: It's called The Painted Word by Thomas Wolfe. It's a
Speaker 1: similar theme. He claims that a lot of modern art
Speaker 1: is not the quality of it isn't recognizable just by
Speaker 1: looking at it. You have to read the reviewers, the critics,
Speaker 1: and they will tell weave it into a story. Then
Speaker 1: when you go back and look at it, you love
Speaker 1: this painting. The story wouldn't have known. Quite interesting. Let's
Speaker 1: talk a little bit about the world of economics and
Speaker 1: some of the things that either do or don't go viral.
Speaker 1: In the book, you write about the Laugher curve, which
Speaker 1: I've always thought of as having an element of truth,
Speaker 1: that there has to be some optimal tax rate that
Speaker 1: maximizes revenues. But the way it seems to have been applied.
Speaker 1: Is let's just call it contraindicate did It was a
Speaker 1: disaster in Kansas. It had terrible effects. So so why
Speaker 1: did the Laugher curve go viral? And why are people
Speaker 1: so willing to overlook some of the downsides of it? Well,
Speaker 1: I have only a partial understanding why it went viral.
Speaker 1: I compare it with the Rubik's cube, which went viral
Speaker 1: at the same time in the book during Reagan sterm Right,
Speaker 1: and so why did Rubik's cube go viral? It's just
Speaker 1: a puzzle, right, and it was it was the right
Speaker 1: story was told about it. Huh, and that was thought
Speaker 1: to be um, somehow deep and important. An obscure mathematician
Speaker 1: had created this uh engineer, right, and that's a narrative,
Speaker 1: just those two words Hungarian engineer at the time when
Speaker 1: we were still had Eastern blocked countries behind the iron curtain. Right,
Speaker 1: so all these things, Uh, it may not work again today.
Speaker 1: Hungary has a different story about it now. But I
Speaker 1: mean the laughter curve also, there's a little story associated
Speaker 1: with it. It's the story of art Laugher and economist
Speaker 1: at dinner at the Two Continents restaurant in Washington fancy restaurant,
Speaker 1: and he drew on a napkin a diagram illustrating his theory.
Speaker 1: Everyone remembers this napkin. I wonder that's just an irrelevant detail.
Speaker 1: But but but somehow it presents the theory is something
Speaker 1: that ought to be obvious. It's also this sort of
Speaker 1: virgin birth that he whips out a pan and starts
Speaker 1: doodling and says, here's where we optimize tax revenues. That
Speaker 1: makes what otherwise would be a fairly dry thesis very
Speaker 1: compelling and very visual. Yeah, it's it's almost like a joke.
Speaker 1: I mean, it has a punchline that that diagram is
Speaker 1: the punchline, because it says that there's always two tax
Speaker 1: rates to reach any revenue, and one of them dominates
Speaker 1: the other. And it's kind of something you can explained
Speaker 1: fairly quickly. Uh. And it's pungy. Yeah, it definitely is.
Speaker 1: So that kind of raises a question in general about
Speaker 1: narratives and the economy, which which came first, specifically our
Speaker 1: stories driving the economy or is the state of the
Speaker 1: economy driving the narratives people used to explain it. Well,
Speaker 1: I'm not an extremist on the answer to that economists
Speaker 1: are an extremist ec I must say it goes only
Speaker 1: one way from the economy to the story. So we
Speaker 1: can just forget that. We don't care about the story.
Speaker 1: That's just trivia. You look at causation a little different.
Speaker 1: I think it goes both ways, and so uh. It
Speaker 1: also interacts with another kind of feedback, which is the
Speaker 1: multiple rounds of expenditure. If you mean, if the government
Speaker 1: spends money, that becomes somebody's income, and that person spends
Speaker 1: some of that and that becomes someone else's income. This
Speaker 1: economy have loved this ever since John Maynard Keynes in
Speaker 1: the thirties. But that that isn't the only kind of
Speaker 1: feedback that's occurring. The other kind of feedback is verbal
Speaker 1: from person to person spreading a story. And I think
Speaker 1: these two feedbacks interact. This is something for further research someday,
Speaker 1: but I mean, qualitatively, I can say what's happening. The
Speaker 1: the great recession that we just went through ten years
Speaker 1: ago was partly the result of the standard Keynesian multiplier,
Speaker 1: but it was also just people telling stories. It resurrected
Speaker 1: the story of the Great Depression, and you can see
Speaker 1: that in Google trends or other other ways of I
Speaker 1: do with various kinds of searches. There was a huge
Speaker 1: impact of the Great Depression stock market crash that suddenly
Speaker 1: became vivid like this is happening again. Well, that's interesting
Speaker 1: because during the let's call it two to oh seven
Speaker 1: early oh eight period, it seemed that a lot of
Speaker 1: the stories were, hey, you can make a ton of
Speaker 1: money just buying houses and flipping it, and people's greed
Speaker 1: monster got stirred up. Hey my neighbors making all this
Speaker 1: money buying and selling houses. I can also how much
Speaker 1: of that is also narrative um viral e going from
Speaker 1: one person to the next. Actually, the term flipping houses
Speaker 1: began to appear near the end of the moon. It
Speaker 1: was often used pejoratively it was crazy that this is
Speaker 1: getting crazy, And it started to appear around two thousand five,
Speaker 1: a couple of years or three years before the recession
Speaker 1: really hit. Do you recall when some of the shows
Speaker 1: started showing up on HDTV and those channels flipped this
Speaker 1: house and it was a run of buy a house,
Speaker 1: fixed up cell at television shows. I think the first
Speaker 1: one was Property Louder in the UK, and then that
Speaker 1: was such a success will show it's it displayed flippers.
Speaker 1: I don't know if it called them flippers, but it
Speaker 1: displayed people who bought a house, fixed it up a
Speaker 1: little bit, used their interior decorating instincts, and then made
Speaker 1: a lot of money fast. That was a powerful narrative because,
Speaker 1: first of all, it feeds your ego. A lot of
Speaker 1: people are decorating their own home and they think they're
Speaker 1: pretty good. Aht it. Even Donald Trump thinks he's pretty
Speaker 1: good decorating hotels. Um, So that's what that's the source
Speaker 1: of ego gratification. And justifiably, some of these people are talented.
Speaker 1: So but that doesn't mean that it's their talent that's
Speaker 1: creating the profits. It's the housing bubble that's creating the profits.
Speaker 1: And people find it difficult to think logically and rationally
Speaker 1: about did I have this success because I'm smart art?
Speaker 1: Was it just chance? Just just a little bit of Look,
Speaker 1: let's let's discuss fake news. In the book you wrote
Speaker 1: quote the brain over time forgets that it once deemed
Speaker 1: stories unreliable. Explain what that means. Uh? Yeah, the way
Speaker 1: the brain you you remember stories that you heard in
Speaker 1: the past as a story, and you don't always have
Speaker 1: well tied to that story in the linkages in your brain.
Speaker 1: What is the source of this story and is it
Speaker 1: a reliable source? So the source connection is somewhat weak.
Speaker 1: You have to remember where you heard the story if
Speaker 1: you're if you're gonna be telling the truth all the time,
Speaker 1: and we try to do that, but I think there's
Speaker 1: a human defect. So you just don't remember where you
Speaker 1: heard a story, but you're in casual conversation with somebody,
Speaker 1: what difference does it make? You know, I might be
Speaker 1: telling a story that's not right, but it's a good story,
Speaker 1: and I'm not you know, I'm not saying this in
Speaker 1: bad faith. I'm not trying to deceive anyone. Nobody really
Speaker 1: knows what the actual truth is. So all kinds of
Speaker 1: untruthful stories bread, viral, e and it isn't anyone's ill
Speaker 1: will that that accomplishes that. You You also explain in
Speaker 1: the book that quote truth is not enough to stop
Speaker 1: false narratives. So that raises two questions. First is why not?
Speaker 1: And second, if truth doesn't stop a false narrative, what
Speaker 1: does well? It does often stop false narratives, So I
Speaker 1: don't it's not all together, but The problem with theories
Speaker 1: are narratives that counter a false narrative is that they
Speaker 1: might not be contagious. It's just not fun, not as compelling.
Speaker 1: So we people can like to entertain each other in conversations.
Speaker 1: So if if I told you dramatically that something you
Speaker 1: believe was wrong, you might find that entertaining. But typically,
Speaker 1: you know, you heard some stories somewhere and it's may
Speaker 1: or may not be true. But uh, I'm not fascinated
Speaker 1: by the story that it was wrong. It just kind
Speaker 1: of It all depends on the exact nature of the story.
Speaker 1: It can easily be that I don't you know, I
Speaker 1: didn't really care to hear this correction. I had a
Speaker 1: nice story that I was telling everyone, and you're telling
Speaker 1: me now that it was wrong. Okay, maybe so a
Speaker 1: little cognitive dissonance kicks in, but the entertainment value is so.
Speaker 1: In the book, you tell the story about a British
Speaker 1: pop singer named Lily Allen, Uh supposedly did a gig
Speaker 1: in oh nine and turned down the opportunity to be
Speaker 1: paid in bitcoin, And if you would have taken that
Speaker 1: and then held onto the bitcoin, she'd be a billionaire.
Speaker 1: So first compelling story second, was it true? Yeah? This,
Speaker 1: uh may or may not be true. Who cares, right,
Speaker 1: it's a nice story. I never verified whether it was true.
Speaker 1: I mentioned it in the book. But it relates to
Speaker 1: a basic human emotion called fomo fear of missing out,
Speaker 1: and that that is a driving for us. So you
Speaker 1: you also want to take investing tips quickly before you
Speaker 1: you know, have ruminated on them for a month, so
Speaker 1: you have to act quickly, so you fear of missing
Speaker 1: out is an important instinct that and maybe it goes
Speaker 1: back to our caveman days when you had the rush
Speaker 1: to grab the food before some other caveman guys. It
Speaker 1: was a matter of survival, not just making a profit
Speaker 1: in the market. Quite quite fascinating. So let's talk a
Speaker 1: little bit about markets. And if we're talking about markets,
Speaker 1: we have to talk about bubbles. If I had to guess,
Speaker 1: the viral nature of bubbles and the stories surrounding them
Speaker 1: had to be a key driver in your desire to
Speaker 1: write this book. Bubbles are perhaps what you're best known for. Um.
Speaker 1: Your work in bubbles and behavioral economics very much student
Speaker 1: contrast to the traditional economic thinking that markets are efficient
Speaker 1: and people are rational. Um, how much did bubbles have
Speaker 1: to do with the ideas behind this book. I think
Speaker 1: that bubbles was a kind of the story that markets
Speaker 1: are efficient is a half truth that has been mentioned
Speaker 1: going back hundred and fifty years, but it never really
Speaker 1: became dominant until Eugene Fama wrote his famous article in
Speaker 1: the late nineteen when was nineteen sixties. I think and
Speaker 1: you and Farma both shared the Nobile process. Yeah, that
Speaker 1: was ironic. It was an interesting experience during Nobel a
Speaker 1: week when I had to spend a week with Eugene Fama,
Speaker 1: who who was still on the view that I was
Speaker 1: totally wrong, But it was kind of It was kind
Speaker 1: of nice because it turns out that we didn't really
Speaker 1: disagree much U much that was factual. We agreed on
Speaker 1: the fact It's like it's a different narrative. So I
Speaker 1: like to describe people as swayed by narratives, and he
Speaker 1: thinks of it as um, what is it? It's changing tastes,
Speaker 1: maybe are changing risk aversion that people are different than
Speaker 1: He's trying to incorporate these things into a theory. He
Speaker 1: has a company called Dimensional Fund Advisors. He he works
Speaker 1: for d f A. Yes, but he was the inspiration
Speaker 1: I think David Booth is the founder of that. Yes,
Speaker 1: he's been with them for what forty years something like that.
Speaker 1: So I I was congratulating him during Nobel week for
Speaker 1: showing decisively how he can beat the market through d
Speaker 1: f A, and he didn't like that. That's not the
Speaker 1: way he wants to put it. So I stopped doing it.
Speaker 1: I was I think it was becoming unwelcome, even though
Speaker 1: I was congratulating him. He doesn't think that he's telling
Speaker 1: people how to beat the market. He's helping people to
Speaker 1: manage their risks. What I find fascinating that you and
Speaker 1: Fama won the Nobel the same year is that there's
Speaker 1: if you draw the Venn diagrams of your separate narratives,
Speaker 1: there's a big overlap in the middle. The overlap is
Speaker 1: essentially markets are kind of sort of efficient, and it's
Speaker 1: very hard to beat them. He he will admit that
Speaker 1: it's very hard to beat that. Your narrative also adds
Speaker 1: and people are irrational, and sometimes that leads to markets
Speaker 1: going wildly out of off kilter before they return back
Speaker 1: to normal normality. I don't think Farma is a big
Speaker 1: believer that bubbles can be either identified or even defined.
Speaker 1: It's just markets reaching extremes. That's one thing he said
Speaker 1: during Nobel Week that I challenge you to say when
Speaker 1: it was that someone could identify a major turning point
Speaker 1: in the market. But I agree with that. It's hard.
Speaker 1: It's hard to pin down when the turning point is
Speaker 1: going to come. Uh. So, uh, maybe maybe we're not that.
Speaker 1: By the way, I admire the man. He's brilliant. He's
Speaker 1: done some tremendous work. Let's talk about one other narrative
Speaker 1: that has gone viral. What do you make of negative
Speaker 1: interest rates essentially exported here first from Japan and now Europe?
Speaker 1: How do these happen? Are we gonna see these in
Speaker 1: the United States? I recall, Uh, you had said a
Speaker 1: long time ago, Well, negative rates can never happen. It violates, uh,
Speaker 1: the basic laws of economics. Uh. Yeah, I used to
Speaker 1: teach that an hour out of minus a half percent
Speaker 1: in in the e EU. So that's but it never
Speaker 1: It can't get down to minus five percent. It can't
Speaker 1: because you would hold cash instead. And it just reflects
Speaker 1: the difficulties of actually storying cash. Uh, and especially when
Speaker 1: there's so many trillions of dollars of it slashing around
Speaker 1: the system, right. So it's an interesting observation that now,
Speaker 1: I wonder, do you know this where they're negative interest
Speaker 1: rates fifty or a hundred years ago? They probably were
Speaker 1: at some point. I don't recall ever reading about negative
Speaker 1: and just rates before the nine Japan situation. Um, but
Speaker 1: I have to imagine that at one point in time
Speaker 1: it must have been, right. It's just it's just not
Speaker 1: part of our narrative in the econ department. So it
Speaker 1: must be that somebody in the nineteenth century had a
Speaker 1: million dollars in cash and he wanted to store it somewhere,
Speaker 1: and uh, someone said, well, I'm gonna charge you. I
Speaker 1: don't you know, if you think about the gold standard,
Speaker 1: that's effectively the equivalent of negative interest rates because you
Speaker 1: have to pay for storage and security for gold bars.
Speaker 1: How is that any different than negative interest rates for
Speaker 1: bonds if they're effectively the same credit risk. So we
Speaker 1: used to talk to our students about the zero lower
Speaker 1: bound just because it's kind of cool, just like the
Speaker 1: gold standard was kind of So I talked about the
Speaker 1: gold standard in my book that the probably didn't really
Speaker 1: talk about the gold standard. They were just on it, right. Uh,
Speaker 1: it was a given, but then it became a moral
Speaker 1: value in the particularly when there was talk of bimetalism,
Speaker 1: bimetalism meaning oh that, uh yeah. I compare it with bitcoin,
Speaker 1: because I think the emotional content of the narrative was
Speaker 1: very similar to bitcoin. It was a new financial innovation
Speaker 1: started to be talked about on the eighteen seventies. Let's
Speaker 1: go off the gold standards, have two standards, and it's
Speaker 1: gonna it's gonna stimulate the economy. That was a time
Speaker 1: when they were partly right because it would expand the
Speaker 1: money supply and that would cause inflation, and that would
Speaker 1: wipe out the real value of debts. It would help
Speaker 1: farmers who were oppressed by deflation. So it has some element.
Speaker 1: But the point is it sounds like bitcoin. It was
Speaker 1: a shocker that someone would have it would go off
Speaker 1: the gold standard. Everything has been predicated on gold as
Speaker 1: the real thing, and you want to put some cheaper metal,
Speaker 1: you're debasing the currency. That's a crime. You got very emotional,
Speaker 1: and it got an emotional in ways that were regional
Speaker 1: that East Coast intellectuals tended to be in favor of
Speaker 1: keeping the gold standard, and people out west, who maybe
Speaker 1: had less college most of them didn't have college at all.
Speaker 1: They were thinking they were pretty smart to have discovered
Speaker 1: this new bimetalism. Was it William Jennings Bryant who said
Speaker 1: we we don't need to be hung on a cross
Speaker 1: of gold. I know I'm mangling that somewhat. Yeah, that's
Speaker 1: in my book too. Turns out he did during the
Speaker 1: eighteen nine Democratic Convention. William Jennings Bryan said you shall
Speaker 1: not crucify us on a cross of gold. But it
Speaker 1: turns out, and that's that it's so famous a quote
Speaker 1: that people still remember it today. Uh. The crowd went
Speaker 1: wild there. They thought it was the second Coming of
Speaker 1: Christ or something like that. Uh. It turns out that
Speaker 1: William Jennings Bryan was quoting somebody else. He didn't say so.
Speaker 1: The other guy who said it was a congressman who
Speaker 1: just said it from some speech, didn't get noticed. It
Speaker 1: was it was that moment he was giving his acceptance
Speaker 1: of the Democratic nomination for the presidency at the convention,
Speaker 1: and there were newspaper reporters there. Uh, and the crowd
Speaker 1: went wild. Uh. And it just became a narrative that
Speaker 1: never got forgotten. Although we've forgotten that, we've forgotten bi
Speaker 1: metalism pretty much. We still remember that quote. We don't
Speaker 1: know what it means anymore. Quite interesting. We were talking
Speaker 1: earlier about bitcoin, and of all the stories that that
Speaker 1: have narratives around it, the bitcoin narrative seems to be
Speaker 1: quite fascinating. I think of it as millennial libertarian gold.
Speaker 1: It's it's a younger generation with certain political beliefs, love
Speaker 1: the idea of this independent currency free of government restraints.
Speaker 1: Although that really hasn't seemed to be the way it's
Speaker 1: worked out, has it. It was a great story. Yeah,
Speaker 1: the government is capable of taxing you. We now know
Speaker 1: that on your bitcoining profits, so they can get at
Speaker 1: your bitco They can as have hackers, you know, they're
Speaker 1: they're all sorts of new telephone hacks, and they're using
Speaker 1: it to go after people's bitcoin wallets. And on top
Speaker 1: of that, a lot of the trades on the bitcoin
Speaker 1: exchanges are are fake trades, just to uh, in fact,
Speaker 1: most of on some of them, Yeah, most are you
Speaker 1: gonna say? Most of the bitcoin trades on certain exchanges
Speaker 1: are are fake? Are not real? They are not Well,
Speaker 1: I've read this, so I'm sorry. Now I don't want
Speaker 1: to accuse someone of a crime, but they're not regulated. Uh,
Speaker 1: and they're doing the story is this is a narrative
Speaker 1: which I'm repeating, is that they do wash trades. Uh.
Speaker 1: They want to show a lot of volume, which makes
Speaker 1: it more credible as a currency. Yeah, that's how you.
Speaker 1: There has been in the history a lot of stock
Speaker 1: manipulation too, and we have to thank the sec for
Speaker 1: um for clamping down on that because that that would happen.
Speaker 1: So so some of the things we've talked about have
Speaker 1: been conspiracy theories to some degree. Why in the modern era,
Speaker 1: with our access to all this science and technology and
Speaker 1: and fact finding in truth sites, why have have these
Speaker 1: conspiracy theories become so prevalent? Is this something fundamental about
Speaker 1: human beings and the way our minds operate. I mean,
Speaker 1: not just the moon landing hoax, but anti vaxer's. There's
Speaker 1: even a rise of flat earthers. What what is that about? Well,
Speaker 1: there is a First of all, there are conspiracies in
Speaker 1: his We know that there are conspiracy so a rational
Speaker 1: person has to be alert to possible can spiracies. But
Speaker 1: we also know that there is a a personality type
Speaker 1: that uh or maybe it's yeah, a personality type that
Speaker 1: is h very UH influenced by conspiracy stories. They used
Speaker 1: to UH in the American Psychiatric Association's Diagnostic and Statistical Manual,
Speaker 1: they used to talk about paranoid schizophrenic people they have
Speaker 1: hallucinations about conspiracies. But in the latest edition they've separated
Speaker 1: it from schizophrenia and they now have something called paranoid
Speaker 1: personality disorder. So these are the extremes, and they're they're
Speaker 1: not schizophrenic, there's just something out about them. They're constantly
Speaker 1: imagining conspiracies. So there are a certain fragment of our population,
Speaker 1: and people who are who are not suffering from any
Speaker 1: disorder but who are very inordinately focused on on conspiracies
Speaker 1: are even more numerous. So if you find someone who
Speaker 1: believes one conspiracy, talk to him further and there will
Speaker 1: probably be many more conspiracies that this person. If it
Speaker 1: goes a little bit, you can get a little bit crazy.
Speaker 1: So the Federal Reserve has been a subject of all
Speaker 1: manner of conspiracy theories. Um, going back to the book
Speaker 1: The Creature from jack'l Islands, what is it about central
Speaker 1: bankers that lend themselves to these theories? Is that just
Speaker 1: a good narrative tale of a bunch of bankers secretly
Speaker 1: manipulating the economy from you know, behind the curtain. What
Speaker 1: what makes this such a compelling And there's a whole
Speaker 1: group of people who whose narratives are they just hate
Speaker 1: the Fed. We should end the Fed, get rid of
Speaker 1: the Fed. What is it about central bankers that lends
Speaker 1: itself so easily to to these theories? Well, I think
Speaker 1: it's Uh, it sounds okay. I'm trying to focus like
Speaker 1: a literary expert who explains why some story is popular. Uh,
Speaker 1: it's partly because we're impressed by the monetary they's just
Speaker 1: like we're impressed by bitcoin or bi metalism. So it's
Speaker 1: a story about something mysterious. We have these pieces of
Speaker 1: paper in our pocket, and why are they valuable? They're
Speaker 1: just pieces of paper. It's kind of a mystery. It
Speaker 1: has to do with power and feeling small. It makes
Speaker 1: you feel bigger and more important if you discover a
Speaker 1: a conspiracy resentment of people who maybe look more successful
Speaker 1: than you, and it's it's it's yeah, it's a bit
Speaker 1: of a mystery story too, that you've uncovered something that
Speaker 1: nobody knows, right, that most people are not evely assume
Speaker 1: isn't happening, so you can tell it's it's a good narrative.
Speaker 1: So so, since we're talking about central bankers. Um in
Speaker 1: the book, you reference Stephen Invests, governor of Sweden's ricks Bank, Um,
Speaker 1: who said quote, I'm a weatherman, I'm a showman, and
Speaker 1: I'm an economist, but above all, I'm a storyteller. I
Speaker 1: tell stories about the future. How true is that for
Speaker 1: for central bankers? Yeah, I think he's right. The question
Speaker 1: to me is what's more important the actions they take
Speaker 1: or the words they say after the of f O
Speaker 1: m C meeting. Is it the meeting or is it
Speaker 1: the press conference after um or or the nature of
Speaker 1: their statement. So I like to think that when the
Speaker 1: FED cut the lower bound to the federal funds rate
Speaker 1: to zero and right after this the rate recession, that
Speaker 1: that story brought up another narrative that is dangerous, and
Speaker 1: that is the narrative of Japan in the nine nineties
Speaker 1: when they cut their interest rate to zero, the Bank
Speaker 1: of Japan, and they were uh, and they had it
Speaker 1: stuck at zero or negative it still is. That's like
Speaker 1: thirty years later and they had a lost decade. Then
Speaker 1: it turned out to be lost decades. The story was
Speaker 1: that Japan looked like the greatest strongest economy in the
Speaker 1: world in the ES. They wrote lots of books about that,
Speaker 1: and then something went wrong, uh, and then they couldn't
Speaker 1: get out of it. So I think it was a
Speaker 1: mistake to put ourselves into the camp of zero interest
Speaker 1: rate countries. They could have kept it at basis points
Speaker 1: and not used the Z word, as I call it
Speaker 1: the zero bounty, because it then it makes the Japanese
Speaker 1: narrative our narrative. If you look at the nick bubble
Speaker 1: in the eighties, I believe I've seen some some analyzes
Speaker 1: that say they were four times as expensive as the
Speaker 1: dot com stocks. It was a giant pebble, really, so
Speaker 1: that collapse is still in one. The cape ratio was
Speaker 1: getting up sixty or seventy. Uh, it was really high.
Speaker 1: And what were we in the thirties, Uh, during the
Speaker 1: dot com collapse, So we got up to the maximum
Speaker 1: at the dot Com peak was in the United States,
Speaker 1: So this is almost double that engine. Yeah, it was
Speaker 1: a lot higher. That's amazing. Let's let's talk about another
Speaker 1: narrative that I found fascinating from the from the book
Speaker 1: the shift from conspicuous consumption to uh, the modern frugality
Speaker 1: and early retirement. How does something like that change over
Speaker 1: what was it twenty years from the conspicuous consumption era
Speaker 1: to spend as little money as possible and the fire
Speaker 1: group they invest and retire early group. Yeah, that might
Speaker 1: be happening. Uh, that is not. We still have a
Speaker 1: very strong consumption demand at this point in history. That
Speaker 1: might be something that would turn around with the next
Speaker 1: recession even when it comes. But the big time when
Speaker 1: it did turn around, and its legendary is the in
Speaker 1: so in the in the roaring twenties, people were you know,
Speaker 1: that was the great gat speed time. People loved conspicuous consumption. Uh.
Speaker 1: And then something changed quite quickly after after the stock
Speaker 1: market crash of October Uh. And I found that narratives.
Speaker 1: But first of all, Christina Romer Economic History and c
Speaker 1: E A chairman at one point showed that consumption demand
Speaker 1: dropped immediately after the twenty nine crash, Like why did
Speaker 1: people stop spending right at that moment? One way of
Speaker 1: learning about it is to go to the Sunday following
Speaker 1: the crash and listen to sermons. And they used to
Speaker 1: report sermons and newspapers. Famous preachers would get into the
Speaker 1: newspaper for their sermon. It doesn't doesn't happen anymore. So
Speaker 1: I could read a little bit about what this and
Speaker 1: the sermons were very moralizing. But where we've been in
Speaker 1: this age of excess and now the stock market is
Speaker 1: crashing and it serves them, right, these pretentious, rich, show
Speaker 1: off people. So so there was something already bruin. There
Speaker 1: was some dissatisfaction with the twenties that was developing, and
Speaker 1: it led to a different attitude in the thirties. Um
Speaker 1: that Winterfreed Holtby was a columnist back then, and she
Speaker 1: said one of her one of her columns, dare to
Speaker 1: be poor. There's so much more to I can't quote
Speaker 1: her exactly, but there's so much more to life than
Speaker 1: just keeping up appearances and showing off. So that attitude
Speaker 1: came back, uh, and I think that was part of
Speaker 1: the Great Depression. It also means the Great Depression wasn't
Speaker 1: as altogether bad as you might think, because it relieved
Speaker 1: you of the of the obligation the show off. You
Speaker 1: could blame it on the recession and people would be
Speaker 1: perfectly under. On the depression, people would be perfectly understanding.
Speaker 1: They knew that some tragedy had fallen. Unfortunately, this was
Speaker 1: also a self fulfilling prophecy. It kept us in the depression,
Speaker 1: but it may have made life more livable. So that
Speaker 1: raises an interesting question. Can can we talk ourselves into
Speaker 1: a recession if the economy is other otherwise fine and
Speaker 1: people are starting to get nervous about maybe it's a
Speaker 1: manufacturing contraction, maybe it's part of the trade war, a taffs.
Speaker 1: Can can we convince ourselves that a recession is coming
Speaker 1: and that affects our behavior that makes a recession come? Absolutely,
Speaker 1: That's that's what I think is at risk right now.
Speaker 1: If you go to Google trends, you will to look
Speaker 1: that allows you to find out what people are searching
Speaker 1: for through time. There was a huge surge in searches
Speaker 1: for the term recession in two thousand seven, just before
Speaker 1: the recession began, and we see another such surge right now.
Speaker 1: So Google trends has been used to predict influenza epidemics.
Speaker 1: It can also be a that way of predicting economic
Speaker 1: narrative epidemics. So somehow we are really talking about recession
Speaker 1: and we're not in a recession. So we'll see what happens.
Speaker 1: It may well trigger every session. Let's let's talk about
Speaker 1: something that's been around for a long time, and it's
Speaker 1: how technology is going to take all our jobs away. Uh.
Speaker 1: First it was automation, then it was artificial intelligence. Now
Speaker 1: it's robots are coming for our jobs. Why why is
Speaker 1: this such a persistent theme throughout hundreds of years? It
Speaker 1: goes back thousands of years actually, but not as strong.
Speaker 1: It's it's it started with the Luddites in eighteen eleven
Speaker 1: and then the swing riots in the eighteen twenties where uh,
Speaker 1: common labor was being replaced by uh we you know,
Speaker 1: fat fabric machines and factories or or agricultural devices that
Speaker 1: simplified harvesting. Um. But it's it's so this narrative has
Speaker 1: been around for about two hundred years, but it flares
Speaker 1: up at certain times. It's like a disease. It mutates,
Speaker 1: and the narrative mutates, and it flares up and it
Speaker 1: can cause problems. Uh. It did that in the eighteen seventies,
Speaker 1: uh and uh or in the eighteen nineties and the
Speaker 1: ninet especially in the Great Depression of the nineteen thirties
Speaker 1: that they were talking about robots in the nineteen thirties,
Speaker 1: and they were worried that this is it, this is
Speaker 1: a major this will go down in here. The year
Speaker 1: ninety nine will go down in history as a major
Speaker 1: turning point when people of common labor will be impoverished
Speaker 1: from now on. That was something a lot of people
Speaker 1: believed and discourage them from spending because they thought, I
Speaker 1: better start saving for this feature that's coming. But then
Speaker 1: we that's not part of our story about the Great
Speaker 1: Depression because that was something that didn't It was something
Speaker 1: that false theory. It didn't happen um and and so
Speaker 1: we've just don't no longer attach that to the explanations
Speaker 1: of that event. So what about the modern era where
Speaker 1: we're seeing automation replace a lot of jobs. We're seeing
Speaker 1: software and artificial intelligence. On Wall Street, half the trading
Speaker 1: desks have been replaced with software. There's talk about accountants
Speaker 1: and lawyers seeing a lot of their their work being
Speaker 1: automated by software. There's even artificial intelligence writing news stories
Speaker 1: by just identifying specific facts and and putting them together.
Speaker 1: They have sports, they can do a sports with a
Speaker 1: data feed. So, so is there a reason to be
Speaker 1: concerned or let me rephrase that some of these stories
Speaker 1: would sound silly and scary and retrospective, appear to have
Speaker 1: some degree of truth. That technology does replace certain, at
Speaker 1: least repetitive non creative jobs. Well, I wouldn't say, uh,
Speaker 1: is translation a repetitive non creative Probably Well, if you're
Speaker 1: translating poetry, not if you're translating something from French to
Speaker 1: English or from uh, you know, Google Translate, you could
Speaker 1: basically get a not great but usable translation of of
Speaker 1: just about any language to any language. So I think
Speaker 1: there is reason to worry. And it goes back to
Speaker 1: the notion that economists have that the in an competitive
Speaker 1: equilibrium perfect equilibrium, UM, people's wages are there equal to
Speaker 1: their marginal product. If you have to sell for what
Speaker 1: you can get and there's no sympathy or morality that intervenes,
Speaker 1: then you're you're gonna get you what you can contribute
Speaker 1: at the margin. And the problem with that is that
Speaker 1: technology changes that. It's not your fault. So there's no
Speaker 1: reason to think that it can't happen. It hasn't happened, um,
Speaker 1: But maybe maybe the turning point is about to come,
Speaker 1: or it has already started coming. Within inequality is rising.
Speaker 1: It's partly because the problem is whether we can invent
Speaker 1: new roles for ourselves that would value people, uh as
Speaker 1: opposed to robots. I think we don't know. But but
Speaker 1: nobody can speak authoritatively about the future. Uh so, so
Speaker 1: it becomes a place for narratives. So so let's talk
Speaker 1: about not the future but the past. How do narratives
Speaker 1: change over time? You you mentioned the Great Depression. It
Speaker 1: sounds like the narratives around the Great Depression have morphed
Speaker 1: so real times, from the twenties to the thirties to
Speaker 1: the present day. Yeah, the the if you do account
Speaker 1: of the phrase great Depression, it has been growing ever
Speaker 1: since it maybe the end of World War Two. They
Speaker 1: didn't call it the Great Depression. In the Great Depression?
Speaker 1: What then? Uh they they would call it hard times,
Speaker 1: But it wasn't singling it out with a special name.
Speaker 1: When did that start? There was a book written in
Speaker 1: nineteen thirty four by Lionel Robbins at the London School
Speaker 1: of Economics called the Great Depression, So yeah, it was.
Speaker 1: It was a book. It was talked about. So you'll
Speaker 1: see references to the Great Depression from nine thirty four on.
Speaker 1: But it became kind of a story of our lives
Speaker 1: later and it gradually grew. It was growing continually, pretty
Speaker 1: much continually in terms of counts of that use of that.
Speaker 1: In the nineteen fifties, John Kenneth Galbray throughout a book
Speaker 1: called ninety nine The Crash. Uh. That was a best seller,
Speaker 1: and I got a lot of attention. People began to worry,
Speaker 1: are they've been worrying all that time about it possibly
Speaker 1: coming back? But it didn't because there wasn't The narrative
Speaker 1: was growing, but it wasn't focused on something that's about
Speaker 1: to happen. And it came back in two thousand seven
Speaker 1: with vengeance when uh George W. Bush gave a speech
Speaker 1: that was later described as very much like uh Franklin
Speaker 1: Delano Roosevelt's the only thing we have to fear is
Speaker 1: fear itself speech. Uh So uh George W. Bush translated
Speaker 1: that into anxiety can feed anxiety, But it was he
Speaker 1: gave the same talk so and a lot of people
Speaker 1: remember that. You wouldn't think that one talk from three
Speaker 1: would still be remembered. Were very selective in what we remember.
Speaker 1: That was such a catchy phrase, the only thing we
Speaker 1: to fear is fear itself. You know, it's funny you
Speaker 1: mentioned um George Bush heading into the financial crisis during
Speaker 1: oh eight oh nine. I was calling it the financial crisis,
Speaker 1: but it seems a few years later we started calling
Speaker 1: it the great recession. That that name seems to have
Speaker 1: It was a credit crisis, it was the subprime debacle.
Speaker 1: It seemed to have changed over time. How common is
Speaker 1: that historical revisionism with the giant uh viral events. By
Speaker 1: the way, that the term great recession was first applied
Speaker 1: to the seventy five recession in a book by Otto
Speaker 1: ex Dyn, I think that was the title of his book,
Speaker 1: the Great Recession um, and that was a giant By
Speaker 1: the way, for people don't remember, stock market fell almost
Speaker 1: is the same amount as it fell in Awight o nine.
Speaker 1: It was about a fifty seven percent drop at least
Speaker 1: the dal Jones almost serious recession are oil embargo that
Speaker 1: whole earlier, and big inflation that was not a fun period.
Speaker 1: And then in nineteen eighty through eighty two we had
Speaker 1: twin recessions, the double dip. Yeah, this is the second
Speaker 1: oil crisis now, And there were people around at that
Speaker 1: time who called it the Great recession, but none of
Speaker 1: those stuck and I'm not sure why. Um uh and uh.
Speaker 1: You can't control these these narrative epidemic. So I have
Speaker 1: to admit I now sometimes refer to the two thousand
Speaker 1: eight nine recession as the Great Recession, because everybody knows
Speaker 1: what I mean When I say that you lose the battle.
Speaker 1: I'm saying, no, it's the nineteen seventy four seventy five recession. Also,
Speaker 1: even the word recession wasn't used until ninety eight. Oh really,
Speaker 1: what was the more common phrase depression? Really? So I
Speaker 1: know we had a number of market crashes and economic events.
Speaker 1: We're at the nineteenth century, before there was a federal reserve.
Speaker 1: Those were not cold recessions. They were called depressions. Well,
Speaker 1: there might have been some creative use of the word,
Speaker 1: but it wasn't the name for them. So yeah, they
Speaker 1: would talk about, um, business depression. They didn't say depression either,
Speaker 1: They say business depression, but it wasn't clear that that
Speaker 1: was a name for a phenomenon is just yeah, like
Speaker 1: business downturn. I could say economic contraction. Is that a
Speaker 1: more modern use? Have to check that one. It sounds
Speaker 1: that sounds like it came in with Burns and Mitchell
Speaker 1: and the book. I'm not sure, but the language does change,
Speaker 1: but the language changes means something because different words have
Speaker 1: different connotations on associations in our mind. Quite fascinating. Before
Speaker 1: we get into some questions we didn't get to. I
Speaker 1: remember you and I doing a television hit together. It
Speaker 1: had to be like oh five or six, talking about
Speaker 1: the house flippers and how prices had run away, and
Speaker 1: people looked at us like we were crazy. I think
Speaker 1: it was it was it was Griffith. His name Bill Griffith,
Speaker 1: Bill Griffith. I mean, my memory isn't I think? I
Speaker 1: think I remember that event, and and I just recall
Speaker 1: that any time you anybody brought up the possibility that, hey,
Speaker 1: you know, these things don't grow to the sky forever.
Speaker 1: Rates are crazy low, they can't stay that way forever.
Speaker 1: In the midst of the boom. If you bring up
Speaker 1: the narrative that this is going to end and end badly,
Speaker 1: people look at you like you're you know, like you
Speaker 1: have the plague. It was an astonishing period. Yeah, I
Speaker 1: I remember that. It was emotionally difficult the experience to make.
Speaker 1: And although you've never been afraid of taking a unpopular
Speaker 1: contrarian position, most of which turned out to be correct
Speaker 1: over time. Yeah, it with some anxiety though, because I'm
Speaker 1: basing it on things that are not leading indicators identified
Speaker 1: by statisticians and uh, I have a sense that some
Speaker 1: of these leading indicators became leading indicators because of a
Speaker 1: self fulfilling Once people believe they're a leading indicator, they
Speaker 1: they make it happen. So there's a little chicken and
Speaker 1: egg problem with that, because they don't become resonant until
Speaker 1: they have a track record. So some of it just
Speaker 1: becomes a little luck as to what happened to work
Speaker 1: once before. How important is luck to not just one
Speaker 1: thing going viral, but something becoming a regular resource that
Speaker 1: people use for decades. I don't know how to answer that.
Speaker 1: I say it reminds me of a book by not
Speaker 1: seem Toler called Fooled by Randomness, and it takes the
Speaker 1: form of a no, it's a great fun about a
Speaker 1: man named Nero Tulip, which is the author. Is this
Speaker 1: a distortion of the authors? It's autobiographical? But you go
Speaker 1: through life feeling ashamed and elated when random events made
Speaker 1: you a success or a failure, and you just can't
Speaker 1: believe that it's just random. Well, we have a tendency
Speaker 1: to want to take credit for things that work out
Speaker 1: and want to blame outside factors. Yeah, but you might
Speaker 1: actually blame yourself. People do blame that. They won't do
Speaker 1: it publicly, but internally they get depressed. And that's that's
Speaker 1: because they a little imposter syndrome or or something that. Yeah,
Speaker 1: so a couple of questions we didn't get to that
Speaker 1: that I have to ask you about. Um. So you've
Speaker 1: written a ton about market bubbles and investor behavior. Um,
Speaker 1: but behavioral economics is more diagnostic than prescriptive. It tells
Speaker 1: what could be done, rather than advise people what to do.
Speaker 1: And that kind of reminds me a little bit of
Speaker 1: the bias blind spot. How people, um have an inability
Speaker 1: to see their own biases. So so what can investors do? Uh?
Speaker 1: If we know we're all biased, but we personally don't
Speaker 1: see our own biases. Well, UM, I don't have a
Speaker 1: good I can tell you what books to read. How
Speaker 1: about Danny Danny Kaneman's Thinking Fast and Slow. That's been
Speaker 1: a best seller. Uh, And it tells you about lots
Speaker 1: of biases that you probably have, and you didn't know
Speaker 1: about it, um. And then two stories I had I
Speaker 1: have to ask um from the book. One is about
Speaker 1: blue jeans just dungarees. How has that I'm wearing. I'm
Speaker 1: wearing stretch blue jeans, which kind of made me think
Speaker 1: of how blue jeans have changed over time. It started
Speaker 1: out that this was for farmers and ranchers. Well even yeah,
Speaker 1: it's right, they were work clothes. Uh. And in the
Speaker 1: eighteen sevent dies, I think there was a governor of
Speaker 1: Indiana called blue Jeans Bill who would wear blue jeans
Speaker 1: to formal occasions and that he thought he was crazy,
Speaker 1: but he made him famous and he was just didn't
Speaker 1: want to be pretentious. Man was it? Was it real?
Speaker 1: Was he a man of the people governor? And man? Yeah,
Speaker 1: a man of the people who wanted to show that
Speaker 1: he was. And it's had that sense to it ever since.
Speaker 1: It's Uh, I'm I'm real, I'm not the fake. Uh.
Speaker 1: It developed in the nineteen twenties further with the dude ranches.
Speaker 1: That was another new Uh. That's where you would go
Speaker 1: to a ranch and you'd ride horses and lassue and
Speaker 1: pretend to be a cowboy, pretend you were a city person.
Speaker 1: But you could do it for a week and you'd
Speaker 1: buy a pair of blue jeans and then and then
Speaker 1: it kind of showed that you were into the in things.
Speaker 1: You were doing dude ranchy things. And then in the
Speaker 1: nineteen thirties it became fashion and that's when they started
Speaker 1: ripping their blue jeans and making them look worn, uh
Speaker 1: to heighten the effect. Uh. And then it got h
Speaker 1: impetus uh from uh The Rebel without a Car James Dean,
Speaker 1: where he fashionably wore blue jeans for the whole movie,
Speaker 1: and it had that was a powerful narrative that that
Speaker 1: movie was admired. Right. He died in a crash driving
Speaker 1: a Porsche like a month before the movie came out.
Speaker 1: Kind of that kind of made the movie go viral,
Speaker 1: didn't it. Yeah, it depends on things like that. Becoming
Speaker 1: assassinated helps your narrative, or murdered or or or die
Speaker 1: in a accident that reveals your reckless side, which is
Speaker 1: what James Dean did. He was speeding, right, and that
Speaker 1: was part of the character in the film. Yes, Uh,
Speaker 1: it was. It was a good movie resonated. Um. So,
Speaker 1: So the other thing I had to ask you about
Speaker 1: was on expectations um. Pedro Domingos is a machine driven
Speaker 1: linguisting linguistic processing expert at Hedge Fund daw And and
Speaker 1: his quote, emerging narratives determine expectations, and expectations determine everything else.
Speaker 1: How important are expectations to to narratives? Right? Well, I think, uh,
Speaker 1: this is older tradition and economics where people would ask people,
Speaker 1: what what do you expect the inflation rate to be
Speaker 1: this year? Uh? George Katona, who was a founder of
Speaker 1: the Michigan Consumer sentiment Well, one of the founders of
Speaker 1: the Michigan Consumer said that he interviewed people and I
Speaker 1: talked to them directly, and he would ask them, what
Speaker 1: do you think the inflation rate will be this year?
Speaker 1: And he got the impression he said that people don't
Speaker 1: really Uh, they looked lost, what what is the inflation rate?
Speaker 1: I don't have any clear idea And then if he
Speaker 1: pressed them, they'd come up with a number. So he said,
Speaker 1: they don't exactly have expectations. But maybe a lot of
Speaker 1: people don't. Um, but maybe it's uh, it's more like
Speaker 1: stories about they heard that the price of something went
Speaker 1: up over the last year and it's been doing that Uh.
Speaker 1: And so they're upset and they're angry. Uh and uh,
Speaker 1: they can talk like that. If you force them to
Speaker 1: do it, then they'll just say, Okay, my expectation is
Speaker 1: ten percent. But they didn't have it. Someone once said
Speaker 1: that the reason oil and guessoline prices are so important
Speaker 1: to people's expectations inflation expectations is it's the only product
Speaker 1: you buy that the price is displayed in toll numbers
Speaker 1: on fort toll signs, and so you everybody sees it.
Speaker 1: You can't help but notice it. How important is that too?
Speaker 1: Stories of prices rising or fall. Yeah, So visual images
Speaker 1: matter for stories. Also, a sense of identity matters. So
Speaker 1: the inflation problem became the most serious problem facing the
Speaker 1: country according to Gallup polls in some time in the
Speaker 1: seventies eighties, maybe say seventies. Uh. And we had a
Speaker 1: very big bout of inflation during that era. Uh right, So,
Speaker 1: but I think that what I was gonna say is
Speaker 1: that it not only affected people's lives directly, but it
Speaker 1: also made them angry. And they started blaming labor unions
Speaker 1: for the inflation, for bidding up, for forcing companies to
Speaker 1: wage price raise prices in order to pay the higher
Speaker 1: wages they were paying the unionized members, and it led
Speaker 1: to a public reaction against unions, and it led to
Speaker 1: ultimately to Ronald Reagan and a general diffusing of the
Speaker 1: power of unions. Now by the time the seventies and
Speaker 1: eighties came around, hadn't unions have been fooling for for
Speaker 1: some time? Well? I don't. Yeah, when I when I
Speaker 1: named Ronald Reagan, I don't mean that he invented the narrative.
Speaker 1: He was uh. He good politicians know that they can't
Speaker 1: routinely invent there. You can you can add some um
Speaker 1: similar narratives that strengthen it, but you have to accept
Speaker 1: that people are onto a certain story. And to be
Speaker 1: a successful politician, you want to, uh, you want to
Speaker 1: repeat the story. So he fired the air traffic controllers
Speaker 1: when they went on strike, which I believe was the
Speaker 1: first time something like that had happened. That played right
Speaker 1: into the we're not going to take it from unions
Speaker 1: anymore narrative, right, So he knew how to create a
Speaker 1: new narrative built around a emerging narrative, so it would
Speaker 1: become part of a constellation of anti union narratives, and
Speaker 1: and that had an impact on prices or just public
Speaker 1: perception of that was a major turning point, now just
Speaker 1: for the US, but around much of the world, that
Speaker 1: the inflation rate was up in the double digit range
Speaker 1: per year UM and that it started to come down
Speaker 1: right from that date. So these are big changes in economics. Uh,
Speaker 1: events that are narrative driven. So economists tend often to
Speaker 1: be focused on predicting month to month fluctuations. Uh, and
Speaker 1: not why did there why was there a global peak
Speaker 1: and inflation around? And that I think has to be
Speaker 1: understood through changing narratives. Now, I would credit Paul Vulcar
Speaker 1: and his actions is fed chief raising rates double digits
Speaker 1: in order to break the back of inflation. But you're
Speaker 1: suggesting the narrative favors what Ronald Reagan did. Well, I
Speaker 1: think they both were important. Fact isn't. It's a complicated story.
Speaker 1: But Voker might not have had the political cap to
Speaker 1: do that if if the public wasn't already angry about inflation.
Speaker 1: So it was a it was a courageous thing for
Speaker 1: him two to create the Great Recession it was called
Speaker 1: at the time, uh in in the nineteen eighties. Uh.
Speaker 1: But he he was judging. I think that he did
Speaker 1: have these uh that people were angry about that there've
Speaker 1: been all this talk about controlling inflation. Uh, and it
Speaker 1: just gets worse and worse. And they also believe this
Speaker 1: was part of the popular narrative then that it eats
Speaker 1: into my wallet. They didn't. They didn't think as many
Speaker 1: economists did that it would it would get into their
Speaker 1: paycheck as well, even though they weren't unionized by uh
Speaker 1: by market forces. Huh. Quite quite interesting. So now let
Speaker 1: me get to my favorite questions that we ask all
Speaker 1: of our guests. This is sort of our speed ounds.
Speaker 1: Feel free to go is as short, uh as you want?
Speaker 1: Tell us the first car you ever owned. You're making model.
Speaker 1: My parents gave me a Rambler Ambassador in the nineties
Speaker 1: sixties because it was a safe car. And I don't
Speaker 1: follow my parents too much in detail, but I've been
Speaker 1: buying safe cars ever since. I recall taking a cab
Speaker 1: with you once and in the back seat you put
Speaker 1: on the seatbelt. I don't know a lot of people
Speaker 1: do that, um from a safety perspective. Not the Rambler,
Speaker 1: by the way, not the Porsche Speedster that James Dean,
Speaker 1: that's right, I'm not a James Dean Duke. Um, what's
Speaker 1: the most important thing people do not know about Bob Schiller? So? Uh,
Speaker 1: I don't know what's important about me? Uh? Is it
Speaker 1: something about my personality? What? What do people not know
Speaker 1: about you? Uh? Well, I okay, I'm thinking, Uh, this
Speaker 1: is just off the wall thought. But uh, I think
Speaker 1: people differ in their um uh, their ability to focus attention,
Speaker 1: and their ability to complete projects. I think I did.
Speaker 1: I was a project oriented person from childhood, but distractable.
Speaker 1: My secretary will tell you I'm distractable, but I keep
Speaker 1: coming back. So I think that people like me should
Speaker 1: do things like write books. And this is what your
Speaker 1: six book? Your how it could be? I say tenth book? Um?
Speaker 1: Who were your early mentors who affected your career? Be
Speaker 1: it in academia or economics? Okay? Um in elementary school,
Speaker 1: I don't know his first name. Mr Keener is my
Speaker 1: science teacher, and he encouraged me I wanted to be
Speaker 1: a sign dentist. Really I am a social scientist. And
Speaker 1: also my high school geometry teacher, Mr Sucy I think
Speaker 1: it was Roger Suci and now know his first name?
Speaker 1: Who uh encourage me about mathematics and I wrote a
Speaker 1: extra paper for his course, which he didn't even ask for,
Speaker 1: in which I use the differential calculus to derive a
Speaker 1: formula for the length of a spiral, And he was
Speaker 1: so encouraging. You're doing original mathematics. I assume somebody else
Speaker 1: has already done that, but I don't know where. I
Speaker 1: assume I got it right. I don't know, so um,
Speaker 1: tell us about some of your favorite books. You've mentioned
Speaker 1: numerous books so far. What what books do you really enjoy?
Speaker 1: What do you read for pleasure or fun? See? One
Speaker 1: thing is that I am distractable, so I often don't
Speaker 1: finish them. I jump around and look for interesting places.
Speaker 1: Are you reading like three or four books at once?
Speaker 1: What I'm doing right now? It's strange. I bought in
Speaker 1: an antiquarian bookstore a bound volume of for eighteen forty
Speaker 1: nine of Little Living Age ever heard of it? It
Speaker 1: was an intellectual magazine like the Atlantaker Harper's from that time,
Speaker 1: and I thought, I'll just, you know, every night, I'll
Speaker 1: read one issue of it. Uh, And it just brought me,
Speaker 1: brings me into the year eighteen forty nine. I'm letting
Speaker 1: them decide what I read. Do you do you I
Speaker 1: make discoveries about the path. For example, I discovered that
Speaker 1: women's liberation was already I just read a story about
Speaker 1: famous women poets in that in that volume in eighteen
Speaker 1: forties eighty nine. Yeah, and they didn't mention Emily Dickinson.
Speaker 1: So then I looked it up. She was only nineteen
Speaker 1: years old in eighteen forty nine. What what are the
Speaker 1: books have you? What? What do you like to recommend
Speaker 1: to people? What or what book just resonated with you?
Speaker 1: So I don't know if I recommend books very often,
Speaker 1: But I like autobiographies are of diaries. So the autobiography
Speaker 1: of Benjamin Franklin influenced me. Uh, He's autobiography, not somebody
Speaker 1: else's biography life. Uh. And the diary of um uh
Speaker 1: the name the version wrote the like of of Samuel Johnson,
Speaker 1: James Boswell, Uh and uh, I just like real thing.
Speaker 1: I like to hear people from the past talk to me.
Speaker 1: That's what little the living age is doing for me.
Speaker 1: And having people from the past, I want to go
Speaker 1: back there and hear them. So James Boswell his own autobiography, Yeah,
Speaker 1: in fact it was written on a daily It's really
Speaker 1: a diary what he did today and he did a
Speaker 1: lot of things that were not entirely moral. He didn't
Speaker 1: plan to publish it, apparently from the standards of his age. Um,
Speaker 1: but he was an overall a nice person. Um. What
Speaker 1: do you do for fun? What do you do when
Speaker 1: you're not researching and writing your own books? Uh? I
Speaker 1: read things. I sit with my wife. Now I'm watching
Speaker 1: television more. But it's whatever she chooses. What sort of
Speaker 1: stuff are you watching on TV? Or things like John
Speaker 1: Oliver and uh oh, the PBS News Hour. These are
Speaker 1: her choice. But I liked them too, So that's interesting.
Speaker 1: Tell us about a time you failed and what you
Speaker 1: learned from the experience. Well, I I had a firm
Speaker 1: called Macro Markets that failed, but it didn't completely fail.
Speaker 1: It went under, it uh collapsed. It's no longer in exist,
Speaker 1: but it did leave a legacy, which was what well
Speaker 1: we We wanted to create markets for real estate, and
Speaker 1: there still is. The Chicago Mercantile Exchange still has a
Speaker 1: market that we helped them create based on the SMB
Speaker 1: Case Schiller home Price now Core Logic home price industry.
Speaker 1: So I think what we did change the world, and
Speaker 1: even if it didn't make us rich. See part of
Speaker 1: the inspiration. It's part of the pleasure. I'm living out
Speaker 1: my father's dream, who wanted me to be an entrepreneur.
Speaker 1: There's something about creativity that is rewarding even if the
Speaker 1: business doesn't succeed. Well, you created the cape ratio, and
Speaker 1: I know there are a number of mutual funds based
Speaker 1: on that. There are that that's fairly entrepreneurial, right. Uh, yeah,
Speaker 1: I I have the American it's not just American, the
Speaker 1: entrepreneurial spirit that I got from my father. Um, what
Speaker 1: do you most optimistic and or pessimistic about today? I
Speaker 1: don't like to be too pessimistic, and I'd like to
Speaker 1: do that. Uh, but I am worried about things like
Speaker 1: global warming and possible possible crisis in the planet. Uh.
Speaker 1: You know, we don't like to think about these things.
Speaker 1: I think we should be more concerned about making agreements
Speaker 1: with other countries about how we're going to handle h
Speaker 1: environmental crises like global warming. We might not be able
Speaker 1: to see them now and identify them, but we should
Speaker 1: have some risk sharing agreements. What are we gonna do
Speaker 1: if global warming gets so bad, for example, that some
Speaker 1: country is unlivable, where do they go? You know who
Speaker 1: wants to take them in. That's the problem. That sounds
Speaker 1: like quite the problem. Um. So, if one of your
Speaker 1: students came to you, or a millennial came to you
Speaker 1: when I was looking for career advice about working in
Speaker 1: the field of either behavioral economics or finance, what sort
Speaker 1: of advice would you give them? Well, this would be
Speaker 1: very general. I think that, Uh, finance is an important
Speaker 1: field I teach. I have an online course that's free,
Speaker 1: by the way. On course there are called financial markets.
Speaker 1: And I'm very proud of that because I have educated
Speaker 1: so many people, not just from Yale, but from all
Speaker 1: over the world who went into finance. So I think
Speaker 1: finance is a good field because it solves problems. Uh.
Speaker 1: And it's not the government solving problems, although it can
Speaker 1: also be. There's government finance as well. Uh. And behavioral
Speaker 1: finances just finance coming into reality, I think uh. Uh,
Speaker 1: it's not as behavioral finance is not a job category
Speaker 1: like finances. UH. But I think in order to be
Speaker 1: well rounded, when should know something about it. I tell
Speaker 1: my students, UH, in my course financial markets, even if
Speaker 1: you don't want to go into finance, you should take
Speaker 1: this course because finance is about making things happen realistically.
Speaker 1: How do you finance activities that are useful for society?
Speaker 1: Quite interesting? And our final question, what is it that
Speaker 1: you know about the world of economics and narratives today
Speaker 1: that you wish you knew forty years ago? Uh? I
Speaker 1: think I'm stalling on this one. I wish I knew
Speaker 1: everything that had come up. And there's so many details
Speaker 1: and uh one one thing. I just visited the Behavioral
Speaker 1: Insights team in UM the UK last week and very
Speaker 1: impressed with all the things. But not now. These are
Speaker 1: sprouting up everywhere. They're they're they're consulting groups effectively that
Speaker 1: help people, uh do their they're financing more effectively in
Speaker 1: account of of what we know, and there's so much
Speaker 1: not a lot of it is experimental, and uh, you
Speaker 1: have to try things out and see what how people
Speaker 1: react because how people react is not for not mostly
Speaker 1: predictable based on just the first theory. Quite interesting. Thank you,
Speaker 1: Bob for being so generous with your time. We have
Speaker 1: been speaking with Professor Robert Schiller of Yale University. His
Speaker 1: new book, Narrative Economics, How Stories Go Viral and Drive
Speaker 1: Major Economic Events was released on October one, If you
Speaker 1: enjoy this conversation, we'll be sure and look up an
Speaker 1: inch or down an inch on Apple iTunes and you
Speaker 1: can see any of our prior two hundred and fifty
Speaker 1: or so conversations we've had over the past five years.
Speaker 1: We love your comments, feedback and suggestions right to us
Speaker 1: at m IB podcast at Bloomberg dot net, Go to
Speaker 1: Apple iTunes, give us a nice review. We really appreciate that.
Speaker 1: I would be remin us if I did not think
Speaker 1: the crack staff that helps put this together each week.
Speaker 1: Attica val Broun is our project director, Michael Boyle is
Speaker 1: our booker slash producer, Caroline Ria is our audio engineer today,
Speaker 1: and Michael bat Nick is my head of research. I'm
Speaker 1: Barry Ritolts. You've been listening to Masters in Business on
Speaker 1: Bloomberg Radio.