WEBVTT - Robert Shiller Discusses Narrative Economics 0:00:02.200 --> 0:00:06.760 This is Master's in Business with Barry Riddholts on Bloomberg Radio. 0:00:07.160 --> 0:00:10.400 This week on the podcast, I have an extra special guest. 0:00:10.480 --> 0:00:15.120 What can I say? Robert Schiller is a legend professor 0:00:15.160 --> 0:00:19.640 at Yale, Nobel laureate, author of ten books, one of 0:00:19.680 --> 0:00:24.040 the people who helped drive behavioral economics to its position 0:00:24.280 --> 0:00:28.600 of influence today. His new book Narrative Economics tells the 0:00:28.680 --> 0:00:33.639 fascinating story of how stories drive markets and economies, and 0:00:33.800 --> 0:00:38.360 why some stories go viral and others don't. It's quite fascinating. 0:00:38.680 --> 0:00:42.240 I could babble for all this time about how fascinating 0:00:42.240 --> 0:00:44.120 it was to chat with him, But rather than me 0:00:44.200 --> 0:00:47.000 do that, let me just say, with no further ado, 0:00:47.280 --> 0:00:52.400 my conversation with Professor Robert Schiller. This is Master's in 0:00:52.479 --> 0:00:57.480 Business with Barry Ridholts on Bloomberg Radio. My extra special 0:00:57.480 --> 0:01:01.120 guest this week is Robert Schiller. He is a professor 0:01:01.160 --> 0:01:04.920 of economics at Yale University. He won the Nobel Prize 0:01:04.959 --> 0:01:09.720 for his empirical analysis of asset prices in He is 0:01:09.800 --> 0:01:15.280 perhaps best known for the cyclically adjusted pe ratio, the 0:01:15.400 --> 0:01:19.920 Case Shiller Housing Index, all sorts of works in behavioral 0:01:19.920 --> 0:01:24.080 economics as well as the author of numerous books, most 0:01:24.160 --> 0:01:30.000 recently Narrative Economics, How stories go viral and drive major 0:01:30.000 --> 0:01:34.920 economic events. Bob Schiller, Welcome to Bloomberg. Very it's a pleasure. 0:01:35.840 --> 0:01:38.840 So it's funny that you, of all people, wrote this 0:01:38.920 --> 0:01:43.360 book when when I think of narratives in the context 0:01:43.400 --> 0:01:47.520 of behavioral economics, I tend to think of the stories 0:01:47.560 --> 0:01:52.840 that investors tell themselves to either rationalize buying a company 0:01:53.000 --> 0:01:57.400 or not selling something that didn't work out. And you 0:01:57.480 --> 0:02:00.480 seem to have taken this to a different direct. Your 0:02:00.520 --> 0:02:05.880 thesis is narratives has a very big impact on markets 0:02:05.920 --> 0:02:09.320 and the economy. Is that different from your prior work 0:02:09.440 --> 0:02:12.200 or is this consistent? I wrote a book in two 0:02:12.200 --> 0:02:16.720 thousand called Irrational Exuberance, which focused on well, I didn't 0:02:16.800 --> 0:02:18.880 use the word narrative a lot, but it was the 0:02:18.919 --> 0:02:22.600 effect of narratives on the stock market. I've decided it's 0:02:22.639 --> 0:02:26.440 bigger than that. It extends to the whole economy, and 0:02:26.919 --> 0:02:29.760 a lot of people know about the importance of narratives, 0:02:29.760 --> 0:02:34.160 but economists mostly don't. So it's it's trying to bring 0:02:34.760 --> 0:02:37.200 the study of narratives into economics because I think it 0:02:37.639 --> 0:02:40.640 matters for the big events that we we see And 0:02:40.680 --> 0:02:44.960 in the book you describe how other fields use narratives 0:02:45.120 --> 0:02:48.560 pretty robustly as a way of either explaining what happened 0:02:48.919 --> 0:02:52.799 or why something happened. Why why has economics been so 0:02:53.600 --> 0:02:56.160 behind the times with this, Well, I don't exactly know 0:02:56.320 --> 0:02:59.120 why it is so different. It has something to do 0:02:59.200 --> 0:03:02.880 with a a spree decor and a department of economics 0:03:02.880 --> 0:03:08.160 and finance that is built around this maximizing framework that 0:03:08.240 --> 0:03:11.880 that people we don't describe their behavior, we describe their 0:03:11.880 --> 0:03:17.600 objectives and assume that they're maximizing. They're expected success with 0:03:17.720 --> 0:03:21.800 these objectives. And there's a reason for that in economics 0:03:21.840 --> 0:03:26.960 that often people know something that we uh that that 0:03:27.120 --> 0:03:30.360 is guiding their actions, and we better figure out what 0:03:30.400 --> 0:03:33.720 that is. And so I think there's that is an 0:03:33.760 --> 0:03:39.040 interesting direction that economics has taken. And uh it leads 0:03:39.160 --> 0:03:43.880 us to things like the optimality of market solutions. UH. 0:03:43.920 --> 0:03:47.720 And so it's become it's great, but it's also become 0:03:47.800 --> 0:03:51.720 something of a religion. UH. And it has blocked people 0:03:51.760 --> 0:03:57.120 seeing the obvious. So homo economists people being profit maximizers. 0:03:57.240 --> 0:04:00.800 I assume you're not really a big believer that that 0:04:00.920 --> 0:04:04.480 is the dominant narrative all the time. It's not the 0:04:04.600 --> 0:04:09.640 dominant narrative all the time. And human mind is very capricious, 0:04:09.960 --> 0:04:13.920 and it jumps from narrative to narrative, and it's socially determined. 0:04:13.920 --> 0:04:17.640 It's not just narratives I tell myself. It's important that 0:04:17.680 --> 0:04:20.719 I tell them to others and they can spread virally. 0:04:21.040 --> 0:04:25.599 So that leads to the question about social media. How 0:04:25.640 --> 0:04:31.159 important is the modern era of fill in the blank, Facebook, Twitter, Instagram, 0:04:31.240 --> 0:04:36.680 whatever to economic and market stories going viral? Well, it 0:04:36.760 --> 0:04:41.200 changes this the scenario, but we did have stories going 0:04:41.320 --> 0:04:45.200 viral thousands of years ago through word of mouth, the 0:04:45.240 --> 0:04:48.360 same way viruses go viral from person to person with 0:04:48.400 --> 0:04:53.040 no intermediary. That's how you catch a disease. Usually you 0:04:53.400 --> 0:04:56.560 meet someone and it spreads from one person to another. 0:04:56.720 --> 0:04:59.760 So it's capable of producing big epidemics. Now it might 0:05:00.000 --> 0:05:03.560 beat them up. It also allows more polarity. It allows 0:05:03.600 --> 0:05:07.479 people to find similarly oriented people and so you might 0:05:07.560 --> 0:05:11.680 see more diversity and views that come about because of 0:05:12.360 --> 0:05:14.760 So I think we have to study the effect of 0:05:15.240 --> 0:05:21.760 social media and other internet programs. But fundamentally, narratives have 0:05:21.880 --> 0:05:26.560 been important in driving the economy. Going back Middllennia. All right, 0:05:26.640 --> 0:05:29.280 so let's talk about some big events, and I want 0:05:29.279 --> 0:05:34.719 to get your feedback as to how various memes impacted them. 0:05:34.760 --> 0:05:37.640 There seem to have been a number of narratives around 0:05:37.680 --> 0:05:40.479 the Great Recession and the credit crisis. The one that 0:05:40.560 --> 0:05:44.760 I remember distinctly home prices never go down. It turned 0:05:44.800 --> 0:05:48.360 out not to be the case. How important were narrative 0:05:48.400 --> 0:05:51.640 economics to the build up to the crisis as well 0:05:51.680 --> 0:05:55.960 as the subsequent collapse. I think home prices that was 0:05:56.000 --> 0:05:58.279 a major cause of the crisis, but we might have 0:05:58.320 --> 0:06:00.240 still had a recession, but it wouldn't have been so 0:06:00.279 --> 0:06:02.880 bad without that. I want to know what I'm interested 0:06:02.880 --> 0:06:06.880 in the big events, and often it's contributing factors that 0:06:06.920 --> 0:06:10.320 make them big. So the idea that homes are a 0:06:10.360 --> 0:06:13.760 great investment, it wasn't so much that people were saying 0:06:14.040 --> 0:06:17.200 home prices never go down. It's that they didn't pay 0:06:17.240 --> 0:06:19.440 any attention to the thought that they might go down. 0:06:20.000 --> 0:06:23.280 I remember I was on stage and in a event 0:06:24.120 --> 0:06:28.280 around two thousand five, two thousand six, and I asked 0:06:28.760 --> 0:06:31.320 a businessman who was on the panel with me, what 0:06:31.400 --> 0:06:34.320 if home piss go down in front of an audience 0:06:34.520 --> 0:06:37.400 and He seemed perplexed. But what are you talking about. 0:06:37.720 --> 0:06:40.479 It's not like he was just saying that they never 0:06:40.520 --> 0:06:43.400 go down. But he said they have. They've never gone down, 0:06:43.600 --> 0:06:46.120 not since of the Great Depression. And I said, well, 0:06:46.120 --> 0:06:48.680 what if that happens again? And he was kind of 0:06:48.720 --> 0:06:52.000 making me look crazy. He couldn't even conceive of the 0:06:52.120 --> 0:06:55.440 idea that prices might fall. Well, when you haven't seen 0:06:55.480 --> 0:06:59.240 them fall substantially since the Great Depression, maybe that's forgivable. 0:07:00.000 --> 0:07:03.080 It didn't. We see a decrease in prices late late 0:07:03.080 --> 0:07:07.200 eighties after the eighties seven crash, and rates had gone up. 0:07:07.240 --> 0:07:10.520 So it's not like it's two generations ago. It was 0:07:10.720 --> 0:07:13.480 thirty years ago. If you're a fifty something, you're a 0:07:13.640 --> 0:07:15.760 business person, that should be in Europe. But it's not 0:07:15.880 --> 0:07:19.000 in the narrative. It's not being talked about. We can 0:07:19.040 --> 0:07:23.280 forget things like, for example, the stock market crash of seven. 0:07:23.840 --> 0:07:27.680 That's a little over thirty years ago. But my students 0:07:27.680 --> 0:07:30.200 don't know anything but never heard of it. What about 0:07:30.200 --> 0:07:33.400 the dot com crash or the O eight oh nine collapse. 0:07:33.840 --> 0:07:36.280 It's got to be a little fresh now. Yeah, well, 0:07:36.560 --> 0:07:39.000 the dot com crash was in the future, in the 0:07:39.040 --> 0:07:44.400 event that I'm describing. But people know about things that 0:07:44.440 --> 0:07:48.320 are that are popular, and the crash is the one 0:07:48.360 --> 0:07:52.560 that everyone remembers. Other ones more recently, how about the 0:07:53.440 --> 0:07:59.040 six crash or yeah, well it was like one day 0:07:59.120 --> 0:08:02.280 there was a six percent drop. Nobody remembers. I mean 0:08:02.280 --> 0:08:05.000 maybe you remember. I don't remember that. That's before my time. 0:08:06.040 --> 0:08:08.800 So let's talk about another big event. Let's let's talk 0:08:08.840 --> 0:08:11.800 about the gold standard. The US for a long time 0:08:11.880 --> 0:08:14.880 was on the gold standard, then we were off. President 0:08:14.880 --> 0:08:17.400 Trump has talked about going back to the gold standard. 0:08:17.920 --> 0:08:20.440 This seems to rise and fall over time. What what 0:08:20.600 --> 0:08:24.920 drives that? Well? I think that what drives narratives is 0:08:24.960 --> 0:08:29.160 a certain creativity that some people have at some moments 0:08:29.240 --> 0:08:33.480 in their lives to invent a story. Uh. And this 0:08:33.559 --> 0:08:38.000 is something that literature department studied economists don't What is it? 0:08:38.360 --> 0:08:42.440 What is it about a story that works? Uh? You know, 0:08:42.600 --> 0:08:46.679 often are I think our attention to ideas is focused 0:08:46.760 --> 0:08:50.640 by the kind of stories that accompany them. Um So 0:08:50.679 --> 0:08:55.360 I thought, for example, and it it there's something about 0:08:55.960 --> 0:09:03.160 visual impact, imagery, something about human interest, something about emotions 0:09:03.240 --> 0:09:08.240 being driven up, uh, something about tie into other stories 0:09:08.240 --> 0:09:11.840 that you already liked uh that the creative art of 0:09:11.920 --> 0:09:17.600 a writer can sometimes surmount and and use and create 0:09:17.640 --> 0:09:20.640 a narrative that will really go viral. It's a difficult 0:09:20.720 --> 0:09:24.720 thing to do. It's it's similar with music. Some music 0:09:24.880 --> 0:09:28.800 goes viral and some doesn't. I think it's it's somewhat random. 0:09:28.880 --> 0:09:33.000 Something gets started and it becomes developed certain associations, and 0:09:33.000 --> 0:09:36.079 then everyone is talking about It has to be right time, 0:09:36.200 --> 0:09:39.840 right place, and just a little bit of luck, uh, 0:09:39.880 --> 0:09:44.480 and maybe requires perfection. So the most the most famous 0:09:44.559 --> 0:09:47.800 listen in the arts, where it's not exactly is sort 0:09:47.800 --> 0:09:51.880 of there. The ballet the Nutcracker. That's the most famous 0:09:51.960 --> 0:09:55.600 ballet in the entire world. It's it's everywhere. But when 0:09:55.600 --> 0:10:00.560 Tchaikovsky first wrote it in it wasn't a big success. 0:10:01.080 --> 0:10:04.680 He had to work at it, uh. And then um, 0:10:04.720 --> 0:10:08.599 it came over to the US and George Ballantine, the 0:10:08.720 --> 0:10:13.520 ballet writer, the ballet director, fixed it, made it into 0:10:13.880 --> 0:10:18.679 a really beautiful ballet, and so it has now gone 0:10:18.800 --> 0:10:23.320 viral and it's we love this ballet. People who don't 0:10:23.320 --> 0:10:27.719 like ballet will go to that one and repeatedly. So 0:10:27.720 --> 0:10:30.640 so there was something about it that that Tchaikovsky had 0:10:30.679 --> 0:10:34.480 an idea. He couldn't quite get it at first, and 0:10:34.559 --> 0:10:39.800 it involved little details that make it somehow work eventually 0:10:40.120 --> 0:10:42.960 be bringing the children. You have to emphasize the children, 0:10:43.280 --> 0:10:47.080 and people love to see children blossoming on stage in 0:10:47.120 --> 0:10:51.400 front of them. So because it's a Christmas themes and 0:10:51.400 --> 0:10:54.520 it's also ties into anything else, and that there's an 0:10:54.559 --> 0:10:57.600 annual prompt to do it, to see it again, so 0:10:57.679 --> 0:11:00.720 a lot of people go every Christmas. Now this isn't 0:11:00.720 --> 0:11:03.320 really an economic narrative. I'm doing a little bit different, 0:11:03.320 --> 0:11:06.600 but it's the same idea that there that the and 0:11:06.640 --> 0:11:09.560 what's so special about that story or any other story? 0:11:10.320 --> 0:11:14.920 Something clicked in and it's just universal. Sorry, by the way, 0:11:15.080 --> 0:11:17.760 have you seen the nutcra I recommend you go see 0:11:17.760 --> 0:11:21.640 it if you haven't. Them. The story you're telling about 0:11:21.760 --> 0:11:25.320 how that when viral reminds me a little bit of 0:11:26.040 --> 0:11:29.559 Derrick Thompson writes for The Atlantic and wrote a book 0:11:29.679 --> 0:11:33.400 How HiT's Happened, and he talks about a number of paintings, 0:11:34.040 --> 0:11:37.040 including all of the Impressionists. It's really a sort of 0:11:37.040 --> 0:11:42.720 fascinating coincidence how a certain group of Impressionists became worldwide 0:11:42.720 --> 0:11:46.960 famous because one of them were collecting other Impressionists work, 0:11:47.679 --> 0:11:51.280 left it in their estate to the French Um, one 0:11:51.280 --> 0:11:53.560 of the French museums, and part of the will was 0:11:53.600 --> 0:11:57.280 it how to be displayed. So suddenly just a group 0:11:57.440 --> 0:12:00.960 of a new style of art that wasn't popular anywhere else, 0:12:01.400 --> 0:12:04.520 and a group of seven or eight artists became worldwide famous. 0:12:04.840 --> 0:12:08.720 Same sort of thing, very serendipitous, very random. This reminds 0:12:08.720 --> 0:12:11.480 me of a book that influenced me a lot years ago. 0:12:11.880 --> 0:12:15.240 It's called The Painted Word by Thomas Wolfe. It's a 0:12:15.280 --> 0:12:18.319 similar theme. He claims that a lot of modern art 0:12:18.880 --> 0:12:22.319 is not the quality of it isn't recognizable just by 0:12:22.360 --> 0:12:25.880 looking at it. You have to read the reviewers, the critics, 0:12:26.480 --> 0:12:29.880 and they will tell weave it into a story. Then 0:12:29.880 --> 0:12:31.520 when you go back and look at it, you love 0:12:31.600 --> 0:12:36.280 this painting. The story wouldn't have known. Quite interesting. Let's 0:12:36.320 --> 0:12:39.320 talk a little bit about the world of economics and 0:12:39.400 --> 0:12:43.080 some of the things that either do or don't go viral. 0:12:43.679 --> 0:12:46.320 In the book, you write about the Laugher curve, which 0:12:46.360 --> 0:12:50.160 I've always thought of as having an element of truth, 0:12:50.280 --> 0:12:53.439 that there has to be some optimal tax rate that 0:12:53.480 --> 0:12:57.199 maximizes revenues. But the way it seems to have been applied. 0:12:57.600 --> 0:13:01.160 Is let's just call it contraindicate did It was a 0:13:01.200 --> 0:13:06.880 disaster in Kansas. It had terrible effects. So so why 0:13:06.920 --> 0:13:11.120 did the Laugher curve go viral? And why are people 0:13:11.120 --> 0:13:15.200 so willing to overlook some of the downsides of it? Well, 0:13:15.240 --> 0:13:18.040 I have only a partial understanding why it went viral. 0:13:18.440 --> 0:13:21.240 I compare it with the Rubik's cube, which went viral 0:13:21.280 --> 0:13:24.520 at the same time in the book during Reagan sterm Right, 0:13:24.960 --> 0:13:27.160 and so why did Rubik's cube go viral? It's just 0:13:27.240 --> 0:13:30.400 a puzzle, right, and it was it was the right 0:13:30.400 --> 0:13:34.240 story was told about it. Huh, and that was thought 0:13:34.280 --> 0:13:38.559 to be um, somehow deep and important. An obscure mathematician 0:13:38.600 --> 0:13:44.320 had created this uh engineer, right, and that's a narrative, 0:13:45.600 --> 0:13:48.720 just those two words Hungarian engineer at the time when 0:13:48.720 --> 0:13:53.600 we were still had Eastern blocked countries behind the iron curtain. Right, 0:13:53.640 --> 0:13:57.680 so all these things, Uh, it may not work again today. 0:13:58.440 --> 0:14:02.600 Hungary has a different story about it now. But I 0:14:02.600 --> 0:14:05.920 mean the laughter curve also, there's a little story associated 0:14:05.920 --> 0:14:09.239 with it. It's the story of art Laugher and economist 0:14:09.679 --> 0:14:15.520 at dinner at the Two Continents restaurant in Washington fancy restaurant, 0:14:16.000 --> 0:14:19.800 and he drew on a napkin a diagram illustrating his theory. 0:14:20.880 --> 0:14:26.120 Everyone remembers this napkin. I wonder that's just an irrelevant detail. 0:14:27.360 --> 0:14:30.360 But but but somehow it presents the theory is something 0:14:30.440 --> 0:14:33.520 that ought to be obvious. It's also this sort of 0:14:33.640 --> 0:14:36.200 virgin birth that he whips out a pan and starts 0:14:36.240 --> 0:14:40.880 doodling and says, here's where we optimize tax revenues. That 0:14:40.960 --> 0:14:45.520 makes what otherwise would be a fairly dry thesis very 0:14:45.520 --> 0:14:49.080 compelling and very visual. Yeah, it's it's almost like a joke. 0:14:49.200 --> 0:14:51.360 I mean, it has a punchline that that diagram is 0:14:51.400 --> 0:14:54.520 the punchline, because it says that there's always two tax 0:14:54.600 --> 0:14:57.560 rates to reach any revenue, and one of them dominates 0:14:57.600 --> 0:15:00.360 the other. And it's kind of something you can explained 0:15:00.400 --> 0:15:05.920 fairly quickly. Uh. And it's pungy. Yeah, it definitely is. 0:15:05.960 --> 0:15:10.240 So that kind of raises a question in general about 0:15:11.040 --> 0:15:16.040 narratives and the economy, which which came first, specifically our 0:15:16.040 --> 0:15:19.520 stories driving the economy or is the state of the 0:15:19.560 --> 0:15:23.960 economy driving the narratives people used to explain it. Well, 0:15:24.000 --> 0:15:27.160 I'm not an extremist on the answer to that economists 0:15:27.160 --> 0:15:29.600 are an extremist ec I must say it goes only 0:15:29.720 --> 0:15:33.000 one way from the economy to the story. So we 0:15:33.000 --> 0:15:35.320 can just forget that. We don't care about the story. 0:15:35.440 --> 0:15:38.040 That's just trivia. You look at causation a little different. 0:15:38.120 --> 0:15:42.560 I think it goes both ways, and so uh. It 0:15:42.640 --> 0:15:47.160 also interacts with another kind of feedback, which is the 0:15:47.240 --> 0:15:51.400 multiple rounds of expenditure. If you mean, if the government 0:15:51.440 --> 0:15:55.600 spends money, that becomes somebody's income, and that person spends 0:15:55.680 --> 0:15:59.320 some of that and that becomes someone else's income. This 0:15:59.480 --> 0:16:03.160 economy have loved this ever since John Maynard Keynes in 0:16:03.200 --> 0:16:06.520 the thirties. But that that isn't the only kind of 0:16:07.200 --> 0:16:10.840 feedback that's occurring. The other kind of feedback is verbal 0:16:10.920 --> 0:16:13.920 from person to person spreading a story. And I think 0:16:13.960 --> 0:16:19.280 these two feedbacks interact. This is something for further research someday, 0:16:19.320 --> 0:16:22.360 but I mean, qualitatively, I can say what's happening. The 0:16:22.360 --> 0:16:25.200 the great recession that we just went through ten years 0:16:25.200 --> 0:16:30.000 ago was partly the result of the standard Keynesian multiplier, 0:16:30.480 --> 0:16:35.000 but it was also just people telling stories. It resurrected 0:16:35.040 --> 0:16:37.720 the story of the Great Depression, and you can see 0:16:37.760 --> 0:16:42.840 that in Google trends or other other ways of I 0:16:42.880 --> 0:16:45.960 do with various kinds of searches. There was a huge 0:16:46.760 --> 0:16:53.000 impact of the Great Depression stock market crash that suddenly 0:16:53.000 --> 0:16:56.680 became vivid like this is happening again. Well, that's interesting 0:16:56.720 --> 0:17:02.000 because during the let's call it two to oh seven 0:17:02.000 --> 0:17:05.040 early oh eight period, it seemed that a lot of 0:17:05.080 --> 0:17:07.560 the stories were, hey, you can make a ton of 0:17:07.600 --> 0:17:11.679 money just buying houses and flipping it, and people's greed 0:17:11.760 --> 0:17:14.639 monster got stirred up. Hey my neighbors making all this 0:17:14.720 --> 0:17:17.720 money buying and selling houses. I can also how much 0:17:17.720 --> 0:17:21.359 of that is also narrative um viral e going from 0:17:21.359 --> 0:17:24.639 one person to the next. Actually, the term flipping houses 0:17:25.720 --> 0:17:29.040 began to appear near the end of the moon. It 0:17:29.080 --> 0:17:33.080 was often used pejoratively it was crazy that this is 0:17:33.119 --> 0:17:37.400 getting crazy, And it started to appear around two thousand five, 0:17:37.760 --> 0:17:41.040 a couple of years or three years before the recession 0:17:41.119 --> 0:17:44.200 really hit. Do you recall when some of the shows 0:17:44.240 --> 0:17:48.800 started showing up on HDTV and those channels flipped this 0:17:48.920 --> 0:17:52.560 house and it was a run of buy a house, 0:17:52.600 --> 0:17:55.400 fixed up cell at television shows. I think the first 0:17:55.440 --> 0:17:58.800 one was Property Louder in the UK, and then that 0:17:58.880 --> 0:18:02.760 was such a success will show it's it displayed flippers. 0:18:03.080 --> 0:18:04.920 I don't know if it called them flippers, but it 0:18:05.040 --> 0:18:07.639 displayed people who bought a house, fixed it up a 0:18:07.640 --> 0:18:12.120 little bit, used their interior decorating instincts, and then made 0:18:12.119 --> 0:18:17.440 a lot of money fast. That was a powerful narrative because, 0:18:17.800 --> 0:18:19.679 first of all, it feeds your ego. A lot of 0:18:19.680 --> 0:18:23.600 people are decorating their own home and they think they're 0:18:23.600 --> 0:18:26.760 pretty good. Aht it. Even Donald Trump thinks he's pretty 0:18:26.760 --> 0:18:33.440 good decorating hotels. Um, So that's what that's the source 0:18:33.480 --> 0:18:38.320 of ego gratification. And justifiably, some of these people are talented. 0:18:38.600 --> 0:18:41.520 So but that doesn't mean that it's their talent that's 0:18:41.560 --> 0:18:45.280 creating the profits. It's the housing bubble that's creating the profits. 0:18:45.320 --> 0:18:49.440 And people find it difficult to think logically and rationally 0:18:49.480 --> 0:18:52.879 about did I have this success because I'm smart art? 0:18:52.960 --> 0:18:55.480 Was it just chance? Just just a little bit of Look, 0:18:55.840 --> 0:18:59.760 let's let's discuss fake news. In the book you wrote 0:19:00.359 --> 0:19:04.840 quote the brain over time forgets that it once deemed 0:19:04.880 --> 0:19:10.480 stories unreliable. Explain what that means. Uh? Yeah, the way 0:19:10.480 --> 0:19:13.159 the brain you you remember stories that you heard in 0:19:13.200 --> 0:19:17.919 the past as a story, and you don't always have 0:19:18.440 --> 0:19:21.240 well tied to that story in the linkages in your brain. 0:19:21.680 --> 0:19:24.359 What is the source of this story and is it 0:19:24.400 --> 0:19:29.719 a reliable source? So the source connection is somewhat weak. 0:19:30.800 --> 0:19:32.879 You have to remember where you heard the story if 0:19:32.880 --> 0:19:34.880 you're if you're gonna be telling the truth all the time, 0:19:35.320 --> 0:19:37.040 and we try to do that, but I think there's 0:19:37.080 --> 0:19:39.919 a human defect. So you just don't remember where you 0:19:40.000 --> 0:19:43.680 heard a story, but you're in casual conversation with somebody, 0:19:43.840 --> 0:19:45.720 what difference does it make? You know, I might be 0:19:45.760 --> 0:19:48.959 telling a story that's not right, but it's a good story, 0:19:49.400 --> 0:19:51.159 and I'm not you know, I'm not saying this in 0:19:51.240 --> 0:19:55.000 bad faith. I'm not trying to deceive anyone. Nobody really 0:19:55.000 --> 0:19:58.199 knows what the actual truth is. So all kinds of 0:19:58.440 --> 0:20:02.440 untruthful stories bread, viral, e and it isn't anyone's ill 0:20:02.520 --> 0:20:06.280 will that that accomplishes that. You You also explain in 0:20:06.320 --> 0:20:09.800 the book that quote truth is not enough to stop 0:20:09.880 --> 0:20:15.040 false narratives. So that raises two questions. First is why not? 0:20:15.359 --> 0:20:19.120 And second, if truth doesn't stop a false narrative, what 0:20:19.200 --> 0:20:23.639 does well? It does often stop false narratives, So I 0:20:23.680 --> 0:20:28.840 don't it's not all together, but The problem with theories 0:20:29.320 --> 0:20:34.439 are narratives that counter a false narrative is that they 0:20:34.520 --> 0:20:37.920 might not be contagious. It's just not fun, not as compelling. 0:20:38.080 --> 0:20:42.639 So we people can like to entertain each other in conversations. 0:20:43.359 --> 0:20:46.159 So if if I told you dramatically that something you 0:20:46.200 --> 0:20:50.560 believe was wrong, you might find that entertaining. But typically, 0:20:50.600 --> 0:20:54.160 you know, you heard some stories somewhere and it's may 0:20:54.240 --> 0:20:58.280 or may not be true. But uh, I'm not fascinated 0:20:58.320 --> 0:21:00.600 by the story that it was wrong. It just kind 0:21:00.600 --> 0:21:05.439 of It all depends on the exact nature of the story. 0:21:05.680 --> 0:21:07.800 It can easily be that I don't you know, I 0:21:07.840 --> 0:21:10.520 didn't really care to hear this correction. I had a 0:21:10.600 --> 0:21:13.240 nice story that I was telling everyone, and you're telling 0:21:13.240 --> 0:21:16.520 me now that it was wrong. Okay, maybe so a 0:21:16.560 --> 0:21:20.159 little cognitive dissonance kicks in, but the entertainment value is so. 0:21:20.200 --> 0:21:23.159 In the book, you tell the story about a British 0:21:23.240 --> 0:21:27.080 pop singer named Lily Allen, Uh supposedly did a gig 0:21:27.119 --> 0:21:30.439 in oh nine and turned down the opportunity to be 0:21:30.480 --> 0:21:33.280 paid in bitcoin, And if you would have taken that 0:21:33.400 --> 0:21:36.439 and then held onto the bitcoin, she'd be a billionaire. 0:21:36.600 --> 0:21:42.399 So first compelling story second, was it true? Yeah? This, 0:21:42.600 --> 0:21:45.280 uh may or may not be true. Who cares, right, 0:21:45.400 --> 0:21:47.960 it's a nice story. I never verified whether it was true. 0:21:48.080 --> 0:21:50.919 I mentioned it in the book. But it relates to 0:21:51.119 --> 0:21:54.520 a basic human emotion called fomo fear of missing out, 0:21:55.320 --> 0:21:57.840 and that that is a driving for us. So you 0:21:57.840 --> 0:22:03.200 you also want to take investing tips quickly before you 0:22:03.200 --> 0:22:06.720 you know, have ruminated on them for a month, so 0:22:06.960 --> 0:22:10.240 you have to act quickly, so you fear of missing 0:22:10.280 --> 0:22:14.480 out is an important instinct that and maybe it goes 0:22:14.520 --> 0:22:17.280 back to our caveman days when you had the rush 0:22:17.320 --> 0:22:19.840 to grab the food before some other caveman guys. It 0:22:19.920 --> 0:22:22.320 was a matter of survival, not just making a profit 0:22:22.320 --> 0:22:25.760 in the market. Quite quite fascinating. So let's talk a 0:22:25.760 --> 0:22:29.520 little bit about markets. And if we're talking about markets, 0:22:29.520 --> 0:22:33.639 we have to talk about bubbles. If I had to guess, 0:22:33.720 --> 0:22:37.600 the viral nature of bubbles and the stories surrounding them 0:22:37.760 --> 0:22:40.800 had to be a key driver in your desire to 0:22:40.840 --> 0:22:47.080 write this book. Bubbles are perhaps what you're best known for. Um. 0:22:47.200 --> 0:22:51.040 Your work in bubbles and behavioral economics very much student 0:22:51.119 --> 0:22:55.400 contrast to the traditional economic thinking that markets are efficient 0:22:55.440 --> 0:22:59.199 and people are rational. Um, how much did bubbles have 0:22:59.320 --> 0:23:02.560 to do with the ideas behind this book. I think 0:23:02.560 --> 0:23:05.560 that bubbles was a kind of the story that markets 0:23:05.560 --> 0:23:10.400 are efficient is a half truth that has been mentioned 0:23:10.960 --> 0:23:15.560 going back hundred and fifty years, but it never really 0:23:16.280 --> 0:23:21.000 became dominant until Eugene Fama wrote his famous article in 0:23:21.040 --> 0:23:25.600 the late nineteen when was nineteen sixties. I think and 0:23:25.640 --> 0:23:29.000 you and Farma both shared the Nobile process. Yeah, that 0:23:29.040 --> 0:23:32.119 was ironic. It was an interesting experience during Nobel a 0:23:32.200 --> 0:23:34.959 week when I had to spend a week with Eugene Fama, 0:23:35.480 --> 0:23:37.679 who who was still on the view that I was 0:23:37.720 --> 0:23:41.040 totally wrong, But it was kind of It was kind 0:23:41.080 --> 0:23:43.560 of nice because it turns out that we didn't really 0:23:43.600 --> 0:23:47.679 disagree much U much that was factual. We agreed on 0:23:47.720 --> 0:23:50.879 the fact It's like it's a different narrative. So I 0:23:50.960 --> 0:23:55.439 like to describe people as swayed by narratives, and he 0:23:55.480 --> 0:23:59.000 thinks of it as um, what is it? It's changing tastes, 0:23:59.080 --> 0:24:03.280 maybe are changing risk aversion that people are different than 0:24:03.640 --> 0:24:06.520 He's trying to incorporate these things into a theory. He 0:24:06.600 --> 0:24:10.520 has a company called Dimensional Fund Advisors. He he works 0:24:10.560 --> 0:24:13.360 for d f A. Yes, but he was the inspiration 0:24:13.440 --> 0:24:15.920 I think David Booth is the founder of that. Yes, 0:24:16.200 --> 0:24:19.000 he's been with them for what forty years something like that. 0:24:19.600 --> 0:24:23.399 So I I was congratulating him during Nobel week for 0:24:24.000 --> 0:24:26.840 showing decisively how he can beat the market through d 0:24:27.000 --> 0:24:29.399 f A, and he didn't like that. That's not the 0:24:29.440 --> 0:24:31.359 way he wants to put it. So I stopped doing it. 0:24:31.359 --> 0:24:34.640 I was I think it was becoming unwelcome, even though 0:24:34.680 --> 0:24:38.159 I was congratulating him. He doesn't think that he's telling 0:24:38.240 --> 0:24:40.800 people how to beat the market. He's helping people to 0:24:40.840 --> 0:24:44.879 manage their risks. What I find fascinating that you and 0:24:45.320 --> 0:24:48.760 Fama won the Nobel the same year is that there's 0:24:48.880 --> 0:24:52.359 if you draw the Venn diagrams of your separate narratives, 0:24:52.840 --> 0:24:56.000 there's a big overlap in the middle. The overlap is 0:24:56.119 --> 0:25:00.160 essentially markets are kind of sort of efficient, and it's 0:25:00.240 --> 0:25:02.840 very hard to beat them. He he will admit that 0:25:02.880 --> 0:25:07.760 it's very hard to beat that. Your narrative also adds 0:25:07.840 --> 0:25:10.760 and people are irrational, and sometimes that leads to markets 0:25:10.800 --> 0:25:15.400 going wildly out of off kilter before they return back 0:25:15.440 --> 0:25:19.480 to normal normality. I don't think Farma is a big 0:25:19.520 --> 0:25:24.240 believer that bubbles can be either identified or even defined. 0:25:24.880 --> 0:25:28.960 It's just markets reaching extremes. That's one thing he said 0:25:29.040 --> 0:25:32.560 during Nobel Week that I challenge you to say when 0:25:32.600 --> 0:25:36.400 it was that someone could identify a major turning point 0:25:36.560 --> 0:25:39.320 in the market. But I agree with that. It's hard. 0:25:39.680 --> 0:25:42.040