How the stories we tell ourselves lead to economic change. What are current pandemic related narratives that are impacting financial markets and the economy.
Topics covered include:
- Examples of mathematical models for epidemics.
- What are the risks when the global economy is opened again.
- Under what circumstances do individuals rely on anecdotal evidence rather than statistics.
- What are some propositions that underly how economic narratives spread.
- What are some examples of major narratives that impact the economy.
- How humans have a bias toward action and how to deal with that when the best course is to stay in place.
- Should investors be increasing their stock exposure now that the markets are rallying and central banks are taking aggressive action.
Learn more about uncertainty and risk
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 294. It’s titled, “How Stories Go Viral and Drive Economic Events.”
The spread of the Happy Birthday Song
I recently celebrated a birthday. It was a good day, peaceful. What I didn’t have was a birthday cake and we did not sing the “Happy Birthday Song.” Robert Shiller, in his book Narrative Economics—and which today’s episode title comes from the subtitle of his book—wrote that “‘the ‘Happy Birthday Song’ may be the best-known song of all time.” He mentioned it’s not particularly admired for its beauty or grace.
“It grew unplanned and uncontrolled,” he writes. “There is no history of a government edict requiring the song to be sung, or a marketing campaign promising lifelong popularity for those who sing it or have it sung to them.” The song spread like an epidemic in the 1920s and 30s, fell back a little bit during World War II, and then it began again. Warner Chappell Music had a copyright from 1935, collecting millions of dollars, up until 2016 when it was determined that “Happy Birthday to You” was very, very similar to an 1893 song titled “Good Morning to All.” It sounded exactly the same, so they lost the trademark.
The math behind epidemics
The “Happy Birthday Song” went viral like an epidemic. We have all become more familiar, I think, with the mathematics behind epidemics. One of the first theories was proposed in 1927 by William Ogilvy Kermack and Anderson Gray McKendrick. Kermack was a Scottish biochemistry, McKendrick a Scottish physician. It was a simple model, it was called the SIR Model where they divided the population.
The percentage of the population that is susceptible to the disease, the percent of the population that is infectious, and the percent of the population that is recovered, and they add up to 100%. According to their model, an epidemic ends when the percentage of the population that recovers and is immune is increasing to such a level that it leaves fewer people that are susceptible and that those susceptible people are then less likely to be exposed to those that are infected.
Now, there are much more complex models. There’s what’s known as a compartmental model called SEIHFR. Where “S” is for susceptible; “E” is for exposed; “I” is infected; “H” is hospitalized; “F” is dead but not buried; and “R” is recovered or buried. A lot more complexity there.
In this episode, we’re going to look at how narratives, stories, impact financial decisions and they act very similarly to a disease virus, in terms of how they spread and then fall back and the epidemic ends.
The uncertainty of reactivating the economy
Now that the global economy has been shut down for a month or more, government officials have to decide how they are going to restart the economy. And as citizens, we have to decide how actively we are willing to participate in the economy, in terms of going out in public again.
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