Narratives drive markets and that had an impact on virtual currencies.
Robert Schiller is a Nobel Peace Prizing winning economist and he was the latest guest on CFTC Talks with CFTC Chief Market Intelligence Officer Andrew Busch.
Busch and Schiller discussed how narratives drove all sorts of economic and market events.
For instance, Schiller noted that many people believe that the real estate boom was created by falling interest rates, but that interest rates had been falling for two decades before the real estate boom.
In Schiller’s research, he found that a narrative had formed that flipping homes- buying a home fixing it up and selling it quickly- had formed as an intriguing way to make money.
Schiller said that during the Great Depression many news articles blamed the proliferation of technology as taking jobs, a narrative, Busch noted, which is still used today to explain periods of high unemployment.
Schiller is working on a book based on his 2017 paper entitled “Narrative Economics.”
“The human brain has always been highly tuned towards narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing. Stories motivate and connect activities to deeply felt values and needs. Narratives “go viral” and spread far, even worldwide, with economic impact. The 1920-21 Depression, the Great Depression of the 1930s, the so-called “Great Recession” of 2007-9 and the contentious political economic situation of today, are considered as the results of the popular narratives of their respective times.” Schiller said in his paper.
Schiller said he intends to include a virtual currency chapter in this book.
“Bitcoin was an invention of computer scientists that was kind of hard to understand.” Schiller said. “It got so far with it that the total value of Bitcoin reached $300 billion.”
He said that much of this growth was driven by the narrative that Bitcoin was an intriguing or even exotic idea.
Bitcoin was initially dreamed up by the pseudonym Satoshi Nakamoto. This led to the website bitcoin.org and Nakamoto, whose true identity Schiller remains skeptical of, then began emailing his idea out “Satoshi Nakamoto was emailing people this out,” Schiller said, “The people there (who received the email) they never met Satoshi Nakamoto. Where is he. There are people claiming to be Satoshi Nakamoto. That’s a great story.”
Schiller compared this to how the Mona Lisa became the phenomenon it is today. Schiller said the reputation of the Mona Lisa increased exponentially after it was stolen from the L’Oeuvre in 1910.
Once the painting became stolen that made the story behind the painting far more intriguing and its reputation was formed.
Despite the great story behind it, Schiller is skeptical of virtual currency playing a major role in economics: “whether it’s our future, I’m very doubtful.”