0:02

This is Master's in Business with

0:04

Barry Riddholts on Bloomberg Radio.

0:07

This week on the podcast, I have an

0:09

extra special guest. What can I say?

0:11

Robert Schiller is a

0:13

legend professor at Yale, Nobel

0:16

laureate, author of ten

0:18

books, one of the people who helped

0:20

drive behavioral economics

0:22

to its position of influence

0:25

today. His new book Narrative

0:27

Economics tells the fascinating story

0:30

of how stories drive markets

0:32

and economies, and why some

0:34

stories go viral and others don't. It's

0:37

quite fascinating. I could babble

0:39

for all this time about how fascinating

0:42

it was to chat with him, But rather than me do

0:44

that, let me just say, with no further

0:46

ado, my conversation with Professor

0:49

Robert Schiller. This is

0:51

Master's in Business with Barry Ridholts

0:54

on Bloomberg Radio. My extra

0:57

special guest this week is Robert

0:59

Schiller. He is a professor

1:01

of economics at Yale University.

1:03

He won the Nobel Prize for his empirical

1:06

analysis of asset prices in He

1:09

is perhaps best known for

1:12

the cyclically adjusted pe

1:14

ratio, the Case Shiller Housing

1:16

Index, all sorts of works

1:19

in behavioral economics as well

1:21

as the author of numerous books,

1:23

most recently Narrative

1:25

Economics, How stories go viral

1:28

and drive major economic

1:30

events. Bob Schiller, Welcome

1:32

to Bloomberg. Very it's a pleasure.

1:35

So it's funny that you, of all

1:38

people, wrote this book when when I think

1:40

of narratives in

1:42

the context of behavioral economics,

1:45

I tend to think of the stories

1:47

that investors tell themselves to

1:50

either rationalize buying a company

1:53

or not selling something

1:55

that didn't work out. And you

1:57

seem to have taken this to a different

1:59

direct. Your thesis is narratives

2:03

has a very big impact on

2:05

markets and the economy. Is that

2:07

different from your prior work or is

2:09

this consistent? I wrote a book in

2:11

two thousand called Irrational Exuberance,

2:14

which focused on well, I didn't use

2:16

the word narrative a lot, but it was the effect

2:19

of narratives on the stock market. I've

2:21

decided it's bigger than that. It extends

2:24

to the whole economy, and

2:26

a lot of people know about the importance of narratives,

2:29

but economists mostly don't.

2:32

So it's it's trying to bring the

2:34

study of narratives into economics because

2:36

I think it matters for the big events

2:39

that we we see And in the book you

2:41

describe how other fields use

2:44

narratives pretty robustly as a

2:46

way of either explaining what happened

2:48

or why something happened. Why why has economics

2:52

been so behind the times with

2:54

this, Well, I don't exactly know why

2:56

it is so different. It has

2:58

something to do with a a spree

3:00

decor and a department of economics

3:02

and finance that is built

3:05

around this maximizing framework

3:08

that that people we don't describe

3:10

their behavior, we describe their objectives

3:12

and assume that they're maximizing.

3:15

They're expected success with these

3:17

objectives. And there's a

3:19

reason for that in economics that

3:22

often people know something

3:25

that we uh that that is guiding

3:27

their actions, and we better

3:29

figure out what that is. And

3:32

so I think there's that is an interesting

3:34

direction that economics has taken.

3:37

And uh it leads us

3:39

to things like the optimality of market

3:41

solutions. UH.

3:43

And so it's become it's great,

3:46

but it's also become something of a religion.

3:49

UH. And it has blocked people

3:51

seeing the obvious. So homo

3:53

economists people being profit

3:56

maximizers. I assume you're not

3:58

really a big believer that

4:00

that is the dominant narrative all

4:02

the time. It's not the dominant

4:05

narrative all the time. And human

4:07

mind is very capricious, and

4:10

it jumps from narrative to narrative, and

4:12

it's socially determined. It's not just

4:14

narratives I tell myself. It's

4:17

important that I tell them to others and

4:19

they can spread virally. So that

4:22

leads to the question about social

4:24

media. How important is

4:26

the modern era of fill

4:29

in the blank, Facebook, Twitter, Instagram,

4:31

whatever to economic and

4:33

market stories going viral?

4:36

Well, it changes this the scenario,

4:39

but we did have stories going viral

4:42

thousands of years ago through word of

4:44

mouth, the same way viruses go viral

4:47

from person to person with no intermediary.

4:50

That's how you catch a disease. Usually

4:53

you meet someone and it spreads

4:55

from one person to another. So it's capable

4:57

of producing big epidemics. Now it might

5:00

beat them up. It also allows

5:02

more polarity. It allows people to find

5:04

similarly oriented people and

5:06

so you might see more diversity

5:09

and views that come about because

5:11

of So I think we have to study

5:13

the effect of social media

5:16

and other internet

5:18

programs. But fundamentally,

5:20

narratives have been important in driving

5:23

the economy. Going back Middllennia.

5:26

All right, so let's talk about some big events,

5:28

and I want to get your feedback as to how

5:32

various memes impacted them.

5:34

There seem to have been a number of narratives

5:37

around the Great Recession and the credit crisis.

5:40

The one that I remember distinctly

5:42

home prices never go down. It

5:44

turned out not to be the case. How

5:46

important were narrative economics

5:49

to the build up to the crisis as

5:51

well as the subsequent collapse.

5:54

I think home prices that was a major

5:56

cause of the crisis, but we might have still had

5:58

a recession, but it wouldn't have been so bad without

6:01

that. I want to know what I'm interested in the

6:03

big events, and often it's

6:05

contributing factors that make them big. So

6:08

the idea that homes are a

6:10

great investment, it wasn't so much

6:12

that people were saying home prices

6:14

never go down. It's that they didn't

6:17

pay any attention to the thought that they might go

6:19

down. I remember I was on stage

6:21

and in a event around

6:24

two thousand five, two thousand six,

6:27

and I asked a businessman who

6:29

was on the panel with me, what if home

6:31

piss go down in front of an

6:33

audience and He seemed perplexed.

6:35

But what are you talking about. It's not

6:38

like he was just saying that they

6:40

never go down. But he said they have. They've

6:42

never gone down, not since of the Great Depression.

6:45

And I said, well, what if that happens again? And

6:47

he was kind of making me look crazy. He

6:50

couldn't even conceive of the idea

6:52

that prices might fall. Well, when you

6:54

haven't seen them fall substantially

6:57

since the Great Depression, maybe that's forgivable.

7:00

It didn't. We see a decrease in prices

7:02

late late eighties after

7:04

the eighties seven crash, and rates

7:06

had gone up. So it's not like it's

7:08

two generations ago. It was thirty

7:11

years ago. If you're a fifty something,

7:13

you're a business person, that should be in Europe.

7:15

But it's not in the narrative. It's

7:17

not being talked about. We can forget

7:19

things like, for example, the stock market

7:21

crash of seven. That's

7:24

a little over thirty years ago. But

7:27

my students don't know anything but never heard of

7:29

it. What about the dot com crash

7:31

or the O eight oh nine collapse. It's

7:34

got to be a little fresh now. Yeah, well,

7:36

the dot com crash was in the future,

7:38

in the event that I'm describing. But

7:42

people know about things that are that are

7:45

popular, and the crash

7:47

is the one that everyone remembers. Other

7:50

ones more recently, how

7:52

about the six crash

7:55

or yeah,

7:57

well it was like one day there was a six percent

8:00

drop. Nobody remembers. I mean

8:02

maybe you remember. I don't remember that. That's before

8:04

my time. So let's

8:06

talk about another big event. Let's let's

8:08

talk about the gold standard. The US

8:11

for a long time was on the gold standard, then we

8:13

were off. President Trump has

8:15

talked about going back to the gold standard.

8:17

This seems to rise and fall over time.

8:20

What what drives that? Well?

8:22

I think that what drives narratives

8:24

is a certain creativity that some

8:27

people have at some moments in their

8:29

lives to invent a story.

8:32

Uh. And this is something that literature

8:35

department studied economists don't

8:37

What is it? What is it about a story

8:40

that works? Uh? You

8:42

know, often are I

8:44

think our attention to ideas is focused

8:46

by the kind of stories that accompany

8:48

them. Um So I thought,

8:51

for example, and it it

8:54

there's something about visual impact,

8:57

imagery, something about human

9:00

interest, something about emotions

9:03

being driven up, uh,

9:06

something about tie into other stories

9:08

that you already liked uh

9:10

that the creative art of a writer can

9:13

sometimes surmount and

9:15

and use and create a narrative

9:18

that will really go viral. It's a difficult

9:20

thing to do. It's it's similar

9:23

with music. Some music goes

9:25

viral and some doesn't. I think

9:27

it's it's somewhat random. Something gets

9:29

started and it becomes developed certain associations,

9:32

and then everyone is talking about It

9:35

has to be right time, right place, and just

9:37

a little bit of luck, uh,

9:39

and maybe requires perfection. So

9:43

the most the most famous listen in

9:45

the arts, where it's not exactly

9:47

is sort of there. The ballet the Nutcracker.

9:50

That's the most famous ballet in the entire

9:53

world. It's it's everywhere. But

9:55

when Tchaikovsky first wrote it in

9:59

it wasn't a big success. He had

10:01

to work at it, uh. And

10:03

then um, it came over to the

10:05

US and George Ballantine, the

10:08

ballet writer, the ballet director,

10:12

fixed it, made it into a really

10:14

beautiful ballet, and so

10:17

it has now gone viral and

10:20

it's we love this ballet. People

10:22

who don't like ballet will go to that one

10:25

and repeatedly. So

10:27

so there was something about it that that

10:29

Tchaikovsky had an idea. He

10:31

couldn't quite get it at first, and

10:34

it involved

10:36

little details that make it somehow

10:38

work eventually be bringing the children.

10:41

You have to emphasize the children, and

10:43

people love to see children blossoming

10:46

on stage in front of them.

10:48

So because it's a Christmas themes

10:51

and it's also ties into anything else,

10:53

and that there's an annual prompt to do

10:56

it, to see it again, so a lot of people

10:58

go every Christmas. Now this

11:00

isn't really an economic narrative. I'm doing

11:02

a little bit different, but it's the same idea

11:05

that there that the and what's so special

11:07

about that story or any other story?

11:10

Something clicked in and it's

11:12

just universal. Sorry, by

11:14

the way, have you seen the nutcra I recommend

11:17

you go see it if you haven't. Them.

11:20

The story you're telling about how that

11:22

when viral reminds me a little

11:24

bit of Derrick Thompson

11:26

writes for The Atlantic and wrote

11:29

a book How HiT's Happened, and

11:31

he talks about a number of paintings,

11:34

including all of the Impressionists. It's really

11:36

a sort of fascinating coincidence how

11:38

a certain group of Impressionists became

11:42

worldwide famous because

11:44

one of them were collecting other Impressionists

11:46

work, left it in their

11:49

estate to the French Um,

11:51

one of the French museums, and part of the

11:53

will was it how to be displayed. So

11:55

suddenly just a group of

11:58

a new style of art that wasn't popular

12:00

anywhere else, and a group of seven

12:02

or eight artists became worldwide famous.

12:04

Same sort of thing, very serendipitous, very

12:07

random. This reminds me of a

12:09

book that influenced me a lot years

12:11

ago. It's called The Painted Word

12:13

by Thomas Wolfe. It's a similar

12:15

theme. He claims that a lot of modern

12:18

art is not the quality

12:20

of it isn't recognizable just by looking

12:22

at it. You have to read the reviewers,

12:25

the critics, and they

12:27

will tell weave it into a story. Then

12:29

when you go back and look at it, you love this painting.

12:32

The story wouldn't have known. Quite

12:35

interesting. Let's talk a little bit about

12:37

the world of economics and some

12:39

of the things that either do or don't

12:42

go viral. In the book, you write

12:44

about the Laugher curve, which I've

12:46

always thought of as having an

12:48

element of truth, that there has

12:50

to be some optimal tax rate

12:53

that maximizes revenues. But

12:55

the way it seems to have been applied. Is

12:58

let's just call it contraindicate did

13:00

It was a disaster in

13:02

Kansas. It had terrible

13:05

effects. So so why did the

13:07

Laugher curve go viral? And

13:10

why are people so willing to overlook some

13:12

of the downsides of it? Well,

13:15

I have only a partial understanding why

13:17

it went viral. I compare it with the

13:19

Rubik's cube, which went viral at the

13:21

same time in the book during Reagan

13:23

sterm Right, and so why did Rubik's

13:26

cube go viral? It's just a puzzle, right,

13:28

and it was it was the right

13:30

story was told about it. Huh,

13:33

and that was thought to be um,

13:35

somehow deep and important. An obscure

13:37

mathematician had created this uh

13:41

engineer, right, and that's

13:43

a narrative, just

13:45

those two words Hungarian engineer at

13:48

the time when we were still had

13:50

Eastern blocked countries behind the iron

13:52

curtain. Right, so all

13:54

these things, Uh, it may not

13:56

work again today. Hungary

13:58

has a different story about

14:01

it now. But I mean the laughter

14:03

curve also, there's a little story associated

14:05

with it. It's the story of art

14:08

Laugher and economist at dinner

14:10

at the Two Continents restaurant

14:13

in Washington fancy restaurant,

14:16

and he drew on a napkin a diagram

14:18

illustrating his theory. Everyone

14:21

remembers this napkin. I

14:23

wonder that's just an irrelevant

14:25

detail. But but

14:27

but somehow it presents the theory

14:30

is something that ought to be obvious. It's

14:32

also this sort of virgin birth that

14:34

he whips out a pan and starts doodling

14:36

and says, here's where we optimize

14:38

tax revenues. That makes

14:41

what otherwise would be a fairly dry

14:43

thesis very compelling

14:46

and very visual. Yeah, it's

14:48

it's almost like a joke. I mean, it has a punchline

14:50

that that diagram is the punchline, because it

14:52

says that there's always two tax

14:54

rates to reach any revenue, and one

14:56

of them dominates the other. And it's

14:59

kind of something you can explained fairly quickly. Uh.

15:02

And it's pungy. Yeah,

15:04

it definitely is. So that kind

15:07

of raises a question in general

15:09

about narratives and the

15:11

economy, which which came

15:14

first, specifically our stories

15:16

driving the economy or is

15:18

the state of the economy driving the

15:21

narratives people used to explain it.

15:23

Well, I'm not an extremist on the answer to

15:25

that economists are an extremist

15:28

ec I must say it goes only one way

15:30

from the economy to the story. So

15:32

we can just forget that. We don't care about the

15:35

story. That's just trivia. You look at causation

15:37

a little different. I think it goes both ways,

15:40

and so uh. It also

15:43

interacts with another kind of feedback,

15:46

which is the multiple rounds of expenditure.

15:49

If you mean, if the government spends money,

15:52

that becomes somebody's income, and

15:54

that person spends some of that and

15:56

that becomes someone else's income. This

15:59

economy have loved this ever since

16:02

John Maynard Keynes in the thirties.

16:04

But that that isn't the only kind of feedback

16:07

that's occurring. The other kind of feedback

16:10

is verbal from person to person spreading

16:12

a story. And I think these two feedbacks

16:14

interact. This is something

16:16

for further research someday,

16:19

but I mean, qualitatively, I can say what's

16:21

happening. The the great recession

16:23

that we just went through ten years ago

16:26

was partly the result of the standard

16:28

Keynesian multiplier, but it

16:30

was also just people telling stories.

16:33

It resurrected the story of the Great

16:36

Depression, and you can see that in

16:38

Google trends or other other

16:40

ways of I do

16:43

with various kinds of searches. There

16:45

was a huge impact

16:47

of the Great Depression stock

16:50

market crash that suddenly

16:53

became vivid like this is happening again.

16:55

Well, that's interesting because during

16:58

the let's call it two

17:00

to oh seven early oh eight

17:02

period, it seemed that a lot

17:04

of the stories were, hey, you can

17:07

make a ton of money just buying houses and flipping

17:09

it, and people's greed

17:11

monster got stirred up. Hey my neighbors

17:14

making all this money buying and selling houses. I

17:16

can also how much of that is also

17:18

narrative um viral e going

17:21

from one person to the next. Actually,

17:23

the term flipping houses began

17:26

to appear near the end of the moon.

17:28

It was often used pejoratively

17:31

it was crazy that this is getting

17:33

crazy, And it

17:35

started to appear around two thousand five, a

17:37

couple of years or three years before the

17:40

recession really hit. Do you recall

17:42

when some of the shows started showing

17:45

up on HDTV

17:47

and those channels flipped this house and

17:50

it was a run of buy a house, fixed

17:52

up cell at television shows. I think

17:55

the first one was Property Louder in the

17:57

UK, and then that was such

17:59

a success will show it's it displayed

18:02

flippers. I don't know if it called them flippers,

18:04

but it displayed people who bought a house, fixed

18:07

it up a little bit, used their interior

18:09

decorating instincts, and then

18:11

made a lot of money fast. That

18:14

was a powerful narrative because,

18:17

first of all, it feeds your ego. A lot of people

18:20

are decorating their own home

18:23

and they think they're pretty good. Aht it. Even

18:25

Donald Trump thinks he's pretty good

18:27

decorating hotels. Um,

18:30

So that's what that's

18:33

the source of ego gratification. And

18:36

justifiably, some of these people are talented.

18:38

So but that doesn't mean that it's

18:40

their talent that's creating the profits. It's

18:43

the housing bubble that's creating the profits.

18:45

And people find it difficult to think

18:48

logically and rationally about did

18:50

I have this success because I'm smart

18:52

art? Was it just chance? Just just a little

18:55

bit of Look, let's let's discuss

18:57

fake news. In the book you wrote

19:00

quote the brain over time

19:02

forgets that it once deemed

19:04

stories unreliable. Explain

19:07

what that means. Uh?

19:09

Yeah, the way the brain you you remember

19:12

stories that you heard in the past as

19:14

a story, and you don't

19:17

always have well tied to

19:19

that story in the linkages in your brain.

19:21

What is the source of this story and

19:24

is it a reliable source? So

19:27

the source connection is somewhat weak.

19:30

You have to remember where you heard the story if

19:32

you're if you're gonna be telling the truth all the time,

19:35

and we try to do that, but I think there's a human

19:37

defect. So you just don't remember where

19:39

you heard a story, but you're in casual

19:42

conversation with somebody, what difference

19:44

does it make? You know, I might be telling a story

19:46

that's not right, but it's a good

19:48

story, and I'm not you know, I'm not

19:50

saying this in bad faith. I'm not trying to deceive

19:53

anyone. Nobody really knows what the

19:55

actual truth is. So all

19:57

kinds of untruthful stories bread,

20:00

viral, e and it isn't anyone's ill

20:02

will that that accomplishes that.

20:05

You You also explain in the book that quote

20:07

truth is not enough to stop

20:09

false narratives. So that

20:11

raises two questions. First

20:14

is why not? And second, if

20:16

truth doesn't stop a false narrative,

20:18

what does well? It

20:21

does often stop false narratives, So

20:23

I don't it's not all together, but

20:26

The problem with theories

20:29

are narratives that

20:32

counter a false narrative is

20:34

that they might not be contagious. It's just not fun,

20:37

not as compelling. So we people

20:39

can like to entertain each other in

20:41

conversations. So if

20:44

if I told you dramatically that something you

20:46

believe was wrong, you might find

20:48

that entertaining. But typically,

20:50

you know, you heard some stories somewhere

20:52

and it's may or may not be

20:54

true. But uh,

20:57

I'm not fascinated by the story that

20:59

it was wrong. It just kind of It

21:02

all depends on the exact nature of

21:04

the story. It can easily be that I

21:07

don't you know, I didn't really care to hear this

21:09

correction. I had a nice story that I

21:11

was telling everyone, and you're telling me now

21:13

that it was wrong. Okay,

21:15

maybe so a little cognitive dissonance

21:17

kicks in, but the entertainment value is so.

21:20

In the book, you tell the story about a

21:22

British pop singer named Lily Allen, Uh

21:25

supposedly did a gig in oh

21:27

nine and turned down the opportunity

21:30

to be paid in bitcoin, And if

21:32

you would have taken that and then held onto the bitcoin,

21:35

she'd be a billionaire. So first

21:37

compelling story second,

21:40

was it true? Yeah? This, uh

21:43

may or may not be true. Who cares, right, it's

21:45

a nice story. I never verified whether it was

21:47

true. I mentioned it in the book. But

21:50

it relates to a basic human emotion

21:52

called fomo fear of missing out,

21:55

and that that is a driving for us. So

21:57

you you also want to

21:59

take investing tips quickly before

22:02

you you know, have ruminated

22:04

on them for a month, so you

22:07

have to act quickly, so you

22:09

fear of missing out is an important instinct

22:12

that and maybe it goes back

22:14

to our caveman days when you had

22:16

the rush to grab the food before some other

22:19

caveman guys. It was a matter of survival,

22:21

not just making a profit in the market. Quite

22:23

quite fascinating. So let's talk

22:25

a little bit about markets.

22:27

And if we're talking about markets, we have to

22:29

talk about bubbles. If

22:32

I had to guess, the viral nature

22:34

of bubbles and the stories surrounding

22:37

them had to be a key driver

22:39

in your desire to write this book.

22:41

Bubbles are perhaps

22:44

what you're best known for. Um.

22:47

Your work in bubbles and behavioral economics

22:50

very much student contrast to the traditional

22:52

economic thinking that markets

22:54

are efficient and people are rational. Um,

22:57

how much did bubbles have to do with

23:00

the ideas behind this book. I

23:02

think that bubbles was a kind of the

23:04

story that markets are efficient is

23:07

a half truth that has

23:09

been mentioned going back hundred

23:13

and fifty years, but it never

23:15

really became dominant until

23:17

Eugene Fama wrote his famous

23:19

article in the late nineteen

23:22

when was nineteen sixties. I

23:24

think and you and Farma both shared

23:27

the Nobile process. Yeah, that was

23:29

ironic. It was an interesting experience

23:31

during Nobel a week when I had to spend

23:33

a week with Eugene Fama, who

23:35

who was still on the view that I was totally

23:38

wrong, But it was kind

23:40

of It was kind of nice because it turns

23:42

out that we didn't really disagree much

23:44

U much that was factual. We

23:47

agreed on the fact It's like it's a

23:49

different narrative. So I like to describe

23:51

people as swayed by narratives,

23:55

and he thinks of it as um,

23:57

what is it? It's changing tastes, maybe

23:59

are changing risk aversion that people

24:02

are different than He's trying to incorporate

24:04

these things into a theory. He has

24:06

a company called Dimensional Fund

24:08

Advisors. He he works for d

24:11

f A. Yes, but he was the inspiration

24:13

I think David Booth is the founder

24:15

of that. Yes, he's been with them for what

24:17

forty years something like that. So

24:19

I I was congratulating him

24:22

during Nobel week for showing

24:24

decisively how he can beat the market through

24:26

d f A, and he didn't like that.

24:29

That's not the way he wants to put it. So I stopped

24:31

doing it. I was I think it was becoming unwelcome,

24:34

even though I was congratulating him. He doesn't

24:36

think that he's telling people how to

24:38

beat the market. He's helping people to

24:40

manage their risks. What I find fascinating

24:43

that you and Fama

24:45

won the Nobel the same year is

24:48

that there's if you draw the Venn diagrams

24:50

of your separate narratives, there's

24:53

a big overlap in the middle. The

24:55

overlap is essentially markets

24:57

are kind of sort of efficient, and it's

25:00

very hard to beat them. He he will

25:02

admit that it's very hard to beat that. Your

25:05

narrative also adds

25:07

and people are irrational, and sometimes that

25:09

leads to markets going wildly out

25:12

of off kilter before they return

25:15

back to normal normality. I

25:17

don't think Farma is a big

25:19

believer that bubbles can

25:21

be either identified or even

25:23

defined. It's just markets

25:25

reaching extremes. That's

25:28

one thing he said during Nobel Week that I

25:30

challenge you to say when it was

25:33

that someone could identify a

25:35

major turning point in the market. But

25:38

I agree with that. It's hard. It's hard

25:40

to pin down when the turning point is going

25:42

to come. Uh. So,

25:44

uh, maybe maybe we're not

25:47

that. By

25:49

the way, I admire the man. He's brilliant.

25:51

He's done some tremendous work.

25:54

Let's talk about one other narrative

25:57

that has gone viral. What do you make

25:59

of negative interest rates

26:02

essentially exported here first from Japan

26:05

and now Europe? How

26:07

do these happen? Are we gonna see these in the United

26:10

States? I recall, Uh,

26:12

you had said a long time ago, Well,

26:15

negative rates can never happen. It violates,

26:17

uh, the basic laws of economics.

26:20

Uh. Yeah, I used to teach that an

26:23

hour out of minus a half percent

26:26

in in the e EU. So

26:28

that's but it never It can't get down

26:30

to minus five percent. It

26:33

can't because you would hold cash instead.

26:35

And it just reflects the difficulties

26:38

of actually storying cash.

26:41

Uh, and especially when there's so

26:43

many trillions of dollars of it slashing around

26:45

the system, right. So

26:48

it's an interesting observation that

26:50

now, I wonder, do you know this where

26:52

they're negative interest rates fifty

26:55

or a hundred years ago? They probably were at some

26:57

point. I don't recall ever reading about negative

26:59

and just rates before the

27:02

nine Japan situation. Um,

27:05

but I have to imagine that at one point

27:07

in time it must have been, right. It's

27:09

just it's just not part of our narrative

27:11

in the econ department. So it must

27:14

be that somebody in the nineteenth century

27:16

had a million dollars in cash and he wanted

27:18

to store it somewhere, and uh,

27:21

someone said, well, I'm gonna charge you. I don't you know,

27:24

if you think about the gold standard, that's

27:26

effectively the equivalent of negative

27:28

interest rates because you have to pay for storage

27:31

and security for gold bars. How

27:33

is that any different than negative interest rates for

27:35

bonds if they're effectively the same

27:38

credit risk. So we used to talk

27:40

to our students about the zero lower bound

27:43

just because it's kind of cool, just like

27:45

the gold standard was kind of So I talked

27:47

about the gold standard in my book that the

27:50

probably didn't really talk about the gold standard.

27:52

They were just on it, right. Uh,

27:54

it was a given, but then it became a moral

27:57

value in the particularly

28:00

when there was talk of bimetalism, bimetalism

28:03

meaning oh that, uh

28:06

yeah. I compare it with bitcoin,

28:09

because I think the emotional content

28:11

of the narrative was very similar to

28:13

bitcoin. It was a new financial

28:15

innovation started to be talked about

28:18

on the eighteen seventies. Let's go off

28:20

the gold standards, have two standards, and it's

28:22

gonna it's gonna stimulate the economy.

28:25

That was a time when they were partly right

28:27

because it would expand the money supply and

28:29

that would cause inflation, and

28:31

that would wipe out the real value

28:34

of debts. It would help farmers who were

28:36

oppressed by deflation. So

28:39

it has some element. But the point

28:41

is it sounds like bitcoin.

28:44

It was a shocker that someone

28:46

would have it would go off the gold standard.

28:49

Everything has been predicated on gold

28:52

as the real thing, and you want to put

28:54

some cheaper metal, you're debasing the currency.

28:57

That's a crime. You got very emotional,

29:00

and it got an emotional in ways

29:02

that were regional that East

29:05

Coast intellectuals tended to be

29:07

in favor of keeping the gold standard, and

29:09

people out west, who maybe

29:12

had less college most of them

29:14

didn't have college at all. They

29:16

were thinking they were pretty smart

29:18

to have discovered this new bimetalism.

29:21

Was it William Jennings Bryant who

29:23

said we we don't need to be hung on a

29:25

cross of gold. I know I'm mangling

29:27

that somewhat. Yeah, that's in my book too.

29:30

Turns out he did during the

29:32

eighteen nine Democratic Convention.

29:35

William Jennings Bryan said you

29:38

shall not crucify us on a cross of

29:40

gold. But it turns out,

29:43

and that's that it's so famous a quote

29:45

that people still remember it today. Uh.

29:49

The crowd went wild there. They

29:51

thought it was the second Coming of Christ or

29:53

something like that. Uh.

29:55

It turns out that William Jennings Bryan

29:58

was quoting somebody else. He didn't

30:00

say so. The other

30:02

guy who said it was a congressman who

30:04

just said it from some speech, didn't get noticed.

30:07

It was it was that moment he was

30:09

giving his acceptance of the Democratic

30:12

nomination for the presidency at

30:14

the convention, and there were newspaper

30:16

reporters there. Uh, and the

30:18

crowd went wild. Uh.

30:21

And it just became a narrative

30:23

that never got forgotten. Although we've

30:25

forgotten that, we've forgotten

30:27

bi metalism pretty much. We still remember

30:30

that quote. We don't know what it means anymore. Quite

30:32

interesting. We were talking earlier

30:35

about bitcoin, and of

30:38

all the stories that that

30:40

have narratives around it, the bitcoin

30:42

narrative seems to be quite fascinating.

30:45

I think of it as millennial

30:48

libertarian gold. It's

30:50

it's a younger generation with

30:52

certain political beliefs, love the idea

30:55

of this independent currency

30:57

free of government restraints. Although

30:59

that really hasn't seemed to be the way it's

31:01

worked out, has it. It was a great

31:03

story. Yeah, the government is

31:05

capable of taxing you. We now

31:08

know that on your bitcoining profits,

31:10

so they can get at your bitco They

31:13

can as have hackers, you know,

31:15

they're they're all sorts of new telephone hacks,

31:18

and they're using it to go after people's bitcoin

31:20

wallets. And on top of that, a lot

31:22

of the trades on the bitcoin exchanges

31:24

are are fake trades, just

31:27

to uh, in fact, most of on some of them,

31:29

Yeah, most are

31:31

you gonna say? Most of the bitcoin trades

31:34

on certain exchanges are are

31:36

fake? Are not real? They are not Well, I've

31:38

read this, so I'm sorry. Now I don't want

31:40

to accuse someone of a crime, but

31:43

they're not regulated. Uh,

31:45

and they're doing the story is this

31:47

is a narrative which I'm repeating,

31:50

is that they do wash trades. Uh.

31:53

They want to show a lot of volume,

31:56

which makes it more credible as a currency.

32:00

Yeah, that's how you. There has been

32:03

in the history a lot of stock manipulation

32:05

too, and we have to

32:07

thank the sec for um

32:10

for clamping down on that because

32:13

that that would happen. So

32:15

so some of the things we've talked about have

32:17

been conspiracy

32:19

theories to some degree. Why

32:22

in the modern era, with our

32:25

access to all this science

32:27

and technology and and fact

32:29

finding in truth sites,

32:32

why have have these conspiracy

32:35

theories become so prevalent? Is

32:37

this something fundamental about human

32:40

beings and the way our minds operate. I

32:42

mean, not just the moon landing hoax, but

32:45

anti vaxer's. There's even

32:47

a rise of flat earthers. What what is

32:49

that about? Well, there is a First

32:52

of all, there are conspiracies in

32:54

his We know that there are conspiracy so

32:57

a rational person has to be alert to possible

32:59

can spiracies. But we also

33:01

know that there is a

33:04

a personality type that

33:06

uh or maybe it's yeah,

33:09

a personality type that is

33:11

h very UH

33:14

influenced by conspiracy stories.

33:17

They used to UH in the American

33:19

Psychiatric Association's Diagnostic

33:21

and Statistical Manual, they used

33:23

to talk about paranoid schizophrenic people

33:26

they have hallucinations

33:28

about conspiracies. But in

33:31

the latest edition they've separated

33:33

it from schizophrenia and they now have something

33:35

called paranoid personality disorder.

33:38

So these are the extremes, and they're

33:40

they're not schizophrenic, there's just

33:43

something out about them. They're constantly imagining

33:45

conspiracies. So there are a certain fragment

33:47

of our population, and people who

33:50

are who are not suffering

33:52

from any disorder but who are very

33:56

inordinately focused on

33:58

on conspiracies are

34:00

even more numerous. So if

34:02

you find someone who believes one conspiracy,

34:05

talk to him further and there will probably

34:07

be many more conspiracies that this person.

34:09

If it goes a little bit, you

34:12

can get a little bit crazy. So the

34:14

Federal Reserve has been

34:17

a subject of all manner of conspiracy

34:19

theories. Um, going back to the

34:21

book The Creature from jack'l Islands,

34:23

what is it about central bankers

34:26

that lend themselves to these theories?

34:29

Is that just a good narrative

34:31

tale of a bunch of bankers

34:33

secretly manipulating the economy from

34:36

you know, behind the curtain. What what makes

34:38

this such a compelling And there's a whole group

34:40

of people who whose narratives are they

34:42

just hate the Fed. We should end the Fed, get

34:44

rid of the Fed. What is it about central bankers

34:47

that lends itself so easily to

34:49

to these theories? Well,

34:52

I think it's Uh, it sounds

34:55

okay. I'm trying to focus like a

34:57

literary expert who explains

34:59

why some story is popular. Uh,

35:02

it's partly because we're

35:04

impressed by the monetary

35:06

they's just like we're impressed by bitcoin or bi

35:08

metalism. So it's a story about

35:11

something mysterious. We have these pieces of paper

35:13

in our pocket, and why are

35:15

they valuable? They're just pieces of paper. It's

35:17

kind of a mystery. It has

35:19

to do with power and feeling

35:22

small. It makes you feel bigger and more

35:24

important if you discover a

35:26

a conspiracy resentment

35:29

of people who

35:32

maybe look more successful than you, and

35:36

it's it's it's yeah, it's a bit of a mystery

35:38

story too, that you've uncovered

35:41

something that nobody knows, right,

35:43

that most people are not evely assume

35:45

isn't happening, so you can tell

35:47

it's it's a good narrative. So

35:50

so, since we're talking about central bankers.

35:53

Um in the book, you reference Stephen

35:56

Invests, governor of Sweden's

35:59

ricks Bank, Um, who said

36:01

quote, I'm a weatherman, I'm a showman,

36:03

and I'm an economist, but above

36:05

all, I'm a storyteller. I

36:08

tell stories about the future. How

36:11

true is that for for central bankers?

36:14

Yeah, I think he's right. The

36:17

question to me is what's more

36:19

important the actions they take

36:22

or the words they say after

36:24

the of f O m C meeting.

36:27

Is it the meeting or is it the press conference after um

36:31

or or the nature of their statement. So

36:33

I like to think that when the FED cut

36:36

the lower bound to

36:38

the federal funds rate to zero

36:41

and right after this the

36:43

rate recession, that

36:46

that story brought up another narrative

36:48

that is dangerous,

36:50

and that is the narrative of Japan in

36:53

the nine nineties when they cut

36:56

their interest rate to zero, the

36:58

Bank of Japan, and they were

37:00

uh, and they had it stuck at

37:03

zero or negative it still is. That's

37:06

like thirty years later and they

37:08

had a lost decade. Then it turned out to be lost

37:11

decades. The story was

37:13

that Japan looked like the greatest strongest

37:16

economy in the world in the

37:18

ES. They wrote lots of books about that,

37:20

and then something went wrong, uh,

37:23

and then they couldn't get out of it. So

37:26

I think it was a mistake to put ourselves into

37:29

the camp of zero interest

37:31

rate countries. They could have kept

37:33

it at basis points

37:35

and not used the Z word, as

37:38

I call it the zero

37:40

bounty, because it then it makes the Japanese

37:43

narrative our narrative. If you

37:45

look at the nick bubble in the

37:47

eighties, I believe

37:49

I've seen some some analyzes that say

37:52

they were four times as expensive as

37:54

the dot com stocks. It was a giant

37:56

pebble, really, so that collapse

37:59

is still in one. The cape ratio was getting

38:01

up sixty or seventy. Uh,

38:04

it was really high. And what were we in the

38:06

thirties, Uh, during the

38:08

dot com collapse, So we

38:11

got up to the maximum at

38:13

the dot Com peak was in

38:15

the United States, So this is almost double

38:17

that engine. Yeah, it was a lot higher. That's

38:20

amazing. Let's let's talk about another

38:22

narrative that I found fascinating from

38:24

the from the book the

38:26

shift from conspicuous consumption

38:29

to uh, the modern

38:31

frugality and early retirement.

38:34

How does something like that change over what

38:37

was it twenty years from the conspicuous

38:40

consumption era to spend as little

38:42

money as possible and the fire

38:44

group they invest

38:46

and retire early group. Yeah, that might

38:48

be happening. Uh,

38:52

that is not. We still

38:54

have a very strong consumption demand at

38:56

this point in history. That might be

38:58

something that would turn around with the next recession

39:01

even when it comes. But the big time when

39:04

it did turn around, and its legendary

39:06

is the in so

39:09

in the in the roaring twenties, people

39:12

were you know, that was the

39:14

great gat speed time. People loved

39:16

conspicuous consumption. Uh.

39:19

And then something changed quite

39:21

quickly after after the stock

39:24

market crash of October Uh.

39:27

And I found that narratives.

39:30

But first of all, Christina Romer

39:33

Economic History and c E A chairman

39:35

at one point showed that consumption

39:38

demand dropped immediately after

39:40

the twenty nine crash, Like why

39:43

did people stop spending right

39:45

at that moment? One way

39:48

of learning about it is to go to the Sunday following

39:50

the crash and listen to sermons. And

39:53

they used to report sermons and newspapers.

39:55

Famous preachers would get into the newspaper

39:58

for their sermon. It doesn't doesn't

40:00

happen anymore. So I could read a little

40:02

bit about what this and the sermons were

40:05

very moralizing. But where

40:07

we've been in this age of excess

40:09

and now the stock market is crashing

40:12

and it serves them, right, these pretentious,

40:15

rich, show off people. So

40:18

so there was something already bruin. There was some dissatisfaction

40:21

with the twenties that was developing,

40:24

and it led to a different attitude in the thirties.

40:27

Um that Winterfreed Holtby was

40:29

a columnist back then, and she

40:31

said one of her one of her columns,

40:34

dare to be poor. There's

40:36

so much more to I can't quote her exactly,

40:38

but there's so much more to life than just

40:41

keeping up appearances and showing off.

40:44

So that attitude came back, uh,

40:47

and I think that was part of the Great Depression.

40:50

It also means the Great Depression wasn't as

40:52

altogether bad as you

40:54

might think, because it relieved

40:57

you of the of the

40:59

obligation the show off.

41:01

You could blame it on the recession and people would

41:03

be perfectly under. On the depression, people

41:06

would be perfectly understanding. They

41:08

knew that some tragedy had fallen. Unfortunately,

41:12

this was also a self fulfilling prophecy.

41:14

It kept us in the depression, but

41:16

it may have made life more livable.

41:19

So that raises an interesting question. Can

41:22

can we talk ourselves into a recession

41:25

if the economy is other otherwise

41:27

fine and people are starting to

41:29

get nervous about maybe

41:31

it's a manufacturing contraction,

41:34

maybe it's part of the trade war,

41:36

a taffs. Can can we convince

41:39

ourselves that a recession is coming

41:41

and that affects our behavior that makes

41:43

a recession come? Absolutely,

41:46

That's that's what I think is at

41:50

risk right now. If you go to

41:52

Google trends, you will to

41:54

look that allows you to find out what people

41:57

are searching for through time. There

41:59

was a huge surge in searches

42:01

for the term recession in two thousand seven,

42:05

just before the recession began, and

42:07

we see another such surge right

42:09

now. So Google trends has

42:11

been used to predict influenza epidemics.

42:14

It can also be a that way of

42:16

predicting economic narrative epidemics.

42:18

So somehow we are really talking about

42:21

recession and we're not in a recession.

42:24

So we'll see what happens. It may well trigger

42:26

every session. Let's let's talk about something

42:28

that's been around for a long time, and it's

42:31

how technology is going to take

42:33

all our jobs away. Uh. First

42:36

it was automation, then it was artificial

42:38

intelligence. Now it's robots are coming

42:40

for our jobs. Why why

42:42

is this such a persistent theme throughout hundreds

42:45

of years? It goes back thousands of

42:47

years actually, but not as strong.

42:49

It's it's it started with the Luddites

42:52

in eighteen eleven and then the swing

42:54

riots in the eighteen twenties where

42:57

uh, common labor was being replaced

42:59

by uh we you know,

43:01

fat fabric machines and

43:03

factories or or

43:06

agricultural devices that simplified

43:09

harvesting. Um.

43:11

But it's it's so this narrative

43:14

has been around for about two

43:16

hundred years, but it flares

43:18

up at certain times. It's like a disease.

43:20

It mutates, and the narrative mutates,

43:23

and it flares up and it can cause

43:26

problems. Uh. It did

43:28

that in the eighteen seventies, uh

43:30

and uh or in the eighteen

43:33

nineties and the ninet especially in the

43:35

Great Depression of the nineteen thirties

43:37

that they were talking about robots in the nineteen

43:40

thirties, and they were worried

43:42

that this is it, this is a major this will

43:44

go down in here. The year ninety

43:46

nine will go down in history as a

43:48

major turning point when people

43:51

of common labor will be impoverished

43:53

from now on. That was

43:55

something a lot of people believed and

43:58

discourage them from spending because

44:00

they thought, I better start saving for this

44:03

feature that's coming. But

44:05

then we that's not part of our story

44:07

about the Great Depression because

44:09

that was something that didn't It

44:11

was something that false theory. It didn't happen

44:14

um and and so we've

44:17

just don't no longer attach that

44:19

to the explanations of that event. So

44:22

what about the modern era where

44:25

we're seeing automation replace

44:27

a lot of jobs. We're seeing software

44:29

and artificial intelligence. On

44:31

Wall Street, half the trading desks have been

44:34

replaced with software. There's talk

44:36

about accountants and lawyers

44:38

seeing a lot of their their work

44:40

being automated by software.

44:43

There's even artificial intelligence

44:46

writing news stories by just identifying

44:48

specific facts and and putting them together.

44:50

They have sports, they can do a sports

44:53

with a data feed. So, so

44:56

is there a reason to be concerned

44:58

or let me rephrase that some

45:01

of these stories would sound silly and

45:03

scary and retrospective, appear

45:06

to have some degree of truth. That technology

45:09

does replace certain, at

45:11

least repetitive non

45:13

creative jobs. Well, I wouldn't

45:15

say, uh, is translation

45:18

a repetitive non creative Probably

45:21

Well, if you're translating poetry, not if

45:23

you're translating something from French to English

45:26

or from uh, you know, Google

45:28

Translate, you could basically get a

45:30

not great but usable

45:33

translation of of just

45:35

about any language to any language. So

45:37

I think there is reason to worry.

45:39

And it goes back to the notion that economists

45:42

have that the in

45:45

an competitive equilibrium perfect

45:47

equilibrium, UM,

45:49

people's wages are there equal

45:51

to their marginal product. If you have

45:53

to sell for what you can get and

45:55

there's no sympathy or morality

45:58

that intervenes, then

46:01

you're you're gonna get you what you can contribute

46:03

at the margin. And the problem

46:06

with that is that technology changes that.

46:08

It's not your fault. So

46:10

there's no reason to think that it can't happen.

46:13

It hasn't happened, um,

46:16

But maybe maybe the

46:18

turning point is about to come, or

46:20

it has already started coming. Within inequality

46:22

is rising. It's partly because

46:25

the problem is whether we can invent new roles

46:27

for ourselves that would value

46:31

people, uh as

46:33

opposed to robots. I

46:35

think we don't know. But

46:38

but nobody can speak authoritatively

46:40

about the future. Uh

46:43

so, so it becomes a place

46:45

for narratives. So so let's talk

46:47

about not the future but the past. How

46:50

do narratives change over time?

46:52

You you mentioned the Great Depression. It

46:55

sounds like the narratives around

46:57

the Great Depression have morphed

46:59

so real times, from the twenties

47:01

to the thirties to the present day. Yeah,

47:04

the the if you do account of

47:06

the phrase great Depression, it

47:09

has been growing ever since

47:12

it maybe the end of World War Two. They

47:14

didn't call it the Great Depression. In the Great Depression?

47:16

What then? Uh they

47:19

they would call it hard times,

47:22

But it wasn't singling it out with

47:25

a special name. When

47:28

did that start? There was a book written

47:30

in nineteen thirty four by Lionel

47:32

Robbins at the London School of Economics

47:34

called the Great Depression, So yeah,

47:37

it was. It was a book. It was talked

47:39

about. So you'll see references to the

47:41

Great Depression from nine thirty

47:43

four on. But it became

47:45

kind of a story of our lives later

47:48

and it gradually grew. It

47:50

was growing continually, pretty much continually

47:53

in terms of counts of that use of that.

47:55

In the nineteen fifties, John Kenneth Galbray

47:58

throughout a book called ninety nine

48:01

The Crash. Uh. That was

48:03

a best seller, and I got a lot of attention.

48:06

People began to worry, are they've been worrying all that

48:08

time about it possibly coming back? But

48:11

it didn't because there wasn't The

48:14

narrative was growing, but it wasn't focused

48:17

on something that's about to happen. And

48:20

it came back in two thousand seven with

48:22

vengeance when uh

48:25

George W. Bush gave a speech

48:27

that was later described

48:31

as very much like uh Franklin

48:33

Delano Roosevelt's the only thing we have

48:36

to fear is fear itself speech. Uh

48:38

So uh George

48:41

W. Bush translated that into anxiety

48:43

can feed anxiety, But it

48:45

was he gave the same talk so

48:48

and a lot of people remember that. You

48:50

wouldn't think that one talk from

48:53

three would still be remembered. Were

48:55

very selective in what we remember. That was

48:58

such a catchy phrase, the only thing we to

49:00

fear is fear itself. You know, it's funny you

49:02

mentioned um George

49:04

Bush heading into the financial crisis

49:07

during oh eight oh nine. I

49:09

was calling it the financial crisis,

49:12

but it seems a few years later we

49:14

started calling it the great recession. That

49:17

that name seems to have It was a credit

49:19

crisis, it was the subprime debacle.

49:21

It seemed to have changed over time.

49:24

How common is that historical

49:27

revisionism with the giant uh

49:31

viral events. By the way, that

49:33

the term great recession was

49:36

first applied to the seventy

49:39

five recession in a book

49:41

by Otto ex Dyn, I think that was

49:43

the title of his book, the Great Recession um,

49:47

and that was a giant By the way, for people don't remember,

49:49

stock market fell almost is

49:52

the same amount as it fell in Awight o nine.

49:54

It was about a fifty seven percent

49:56

drop at least the dal Jones almost serious

49:59

recession are oil

50:01

embargo that whole earlier, and big

50:03

inflation that was not a fun period. And

50:06

then in nineteen eighty through

50:08

eighty two we had twin recessions, the

50:11

double dip. Yeah, this is the second oil crisis

50:13

now, And there

50:15

were people around at that time who called it the

50:18

Great recession, but none of those

50:20

stuck and I'm not sure why. Um

50:23

uh and uh. You can't control

50:25

these these narrative epidemic. So I

50:27

have to admit I now sometimes refer to

50:30

the two thousand eight nine recession

50:32

as the Great Recession, because everybody knows what I

50:35

mean When I say that you lose the battle.

50:38

I'm saying, no, it's the nineteen seventy

50:40

four seventy five recession. Also,

50:42

even the word recession wasn't

50:44

used until ninety eight. Oh

50:47

really, what was the more common phrase depression?

50:50

Really? So I know we had a number of

50:53

market crashes and economic

50:55

events. We're at the nineteenth century,

50:57

before there was a federal reserve. Those

51:00

were not cold recessions. They were called depressions.

51:02

Well, there might have been some creative use of the

51:05

word, but it wasn't the name

51:07

for them. So yeah, they

51:09

would talk about, um,

51:12

business depression. They didn't say depression

51:14

either, They say business depression, but it

51:16

wasn't clear that that was a name for a phenomenon

51:19

is just yeah, like business downturn.

51:21

I could say economic contraction. Is that a

51:23

more modern use? Have to check that one.

51:26

It sounds that sounds like it came in with Burns

51:28

and Mitchell and the book.

51:31

I'm not sure, but the language

51:34

does change, but the language changes means something

51:36

because different words have different connotations

51:40

on associations in our mind. Quite

51:42

fascinating. Before we get into some questions

51:45

we didn't get to. I remember you and

51:47

I doing a television hit together.

51:50

It had to be like oh five or

51:52

six, talking about the

51:55

house flippers and how prices had run

51:58

away, and people looked at us like

52:00

we were crazy. I

52:03

think it was it was it

52:05

was Griffith. His name Bill

52:07

Griffith, Bill Griffith. I mean, my

52:09

memory isn't I think? I think I remember

52:12

that event, and and I just

52:14

recall that any time you anybody

52:17

brought up the possibility that, hey,

52:19

you know, these things don't grow to the sky

52:21

forever. Rates are crazy low, they

52:23

can't stay that way forever. In

52:26

the midst of the boom. If you bring

52:28

up the narrative that this

52:30

is going to end and end badly, people

52:33

look at you like you're you know, like you

52:35

have the plague. It was an

52:37

astonishing period. Yeah,

52:40

I I remember that. It was emotionally

52:42

difficult the experience to make. And

52:46

although you've never been afraid of taking

52:48

a unpopular contrarian

52:51

position, most of which turned out

52:53

to be correct over time. Yeah,

52:55

it with some anxiety though, because I'm

52:57

basing it on things that are not leading

53:00

indicators identified by statisticians

53:03

and uh, I have a sense that some

53:06

of these leading indicators became leading indicators

53:08

because of a self fulfilling Once

53:11

people believe they're a leading indicator, they

53:14

they make it happen. So there's

53:16

a little chicken and egg problem with that, because

53:19

they don't become resonant

53:21

until they have a track record. So some

53:23

of it just becomes a little luck as to what happened

53:26

to work once before. How important

53:28

is luck to not

53:31

just one thing going viral, but

53:33

something becoming a regular

53:36

resource that people use for decades. I

53:40

don't know how to answer that. I say it reminds

53:42

me of a book by not seem Toler

53:45

called Fooled by Randomness, and it takes

53:47

the form of a no, it's a great fun about

53:51

a man named Nero Tulip, which is

53:53

the author. Is this a distortion

53:56

of the authors? It's autobiographical? But

53:58

you go through life feeling ashamed

54:00

and elated when random events

54:03

made you a success or a failure, and

54:05

you just can't believe that it's

54:07

just random. Well,

54:10

we have a tendency to want to

54:12

take credit for things that work out and

54:14

want to blame outside factors.

54:17

Yeah, but you might actually blame yourself. People

54:20

do blame that. They won't do it publicly,

54:22

but internally they get depressed. And

54:25

that's that's because they a

54:27

little imposter syndrome or or something

54:29

that. Yeah, so a couple

54:31

of questions we didn't get to that that

54:34

I have to ask you about. Um.

54:37

So you've written a ton about market bubbles

54:40

and investor behavior. Um,

54:42

but behavioral economics is more diagnostic

54:45

than prescriptive. It tells

54:47

what could be done, rather than

54:50

advise people what to do. And

54:52

that kind of reminds me a little bit of the

54:55

bias blind spot. How people,

54:58

um have an inability to see

55:00

their own biases. So so what

55:02

can investors do? Uh?

55:05

If we know we're all biased, but we personally

55:08

don't see our own biases. Well,

55:11

UM, I don't have a good I

55:14

can tell you what books to read. How about Danny

55:16

Danny Kaneman's Thinking Fast and Slow.

55:19

That's been a best seller. Uh,

55:21

And it tells you about lots of biases

55:24

that you probably have, and you didn't know about

55:26

it, um. And then

55:29

two stories I had I have to ask

55:31

um from the book. One is

55:34

about blue jeans just dungarees.

55:36

How has that I'm

55:38

wearing. I'm wearing stretch blue

55:41

jeans, which kind of made me think of how

55:44

blue jeans have changed over time.

55:46

It started out that this was for farmers

55:49

and ranchers. Well even yeah, it's

55:51

right, they were work clothes. Uh.

55:53

And in the eighteen sevent

55:55

dies, I think there was a governor of Indiana

55:58

called blue Jeans Bill who

56:00

would wear blue jeans to formal occasions

56:04

and that he thought he was crazy, but he made him

56:06

famous and he was just didn't want

56:08

to be pretentious. Man was it?

56:10

Was it real? Was he a man of the people governor?

56:13

And man? Yeah, a man of the people

56:15

who wanted to show that he was. And

56:18

it's had that sense to it ever since.

56:20

It's Uh, I'm I'm

56:22

real, I'm not the fake. Uh.

56:25

It developed in the nineteen twenties further with

56:28

the dude ranches. That was another new

56:30

Uh. That's where you would go to a ranch

56:33

and you'd ride horses and lassue and

56:36

pretend to be a cowboy, pretend you were a city

56:38

person. But you could do it for a week and

56:40

you'd buy a pair of blue jeans and then

56:43

and then it kind of showed that you were

56:45

into the in things. You were doing dude

56:47

ranchy things. And then in the nineteen

56:49

thirties it became fashion and

56:51

that's when they started ripping their blue jeans and making

56:54

them look worn, uh to

56:57

heighten the effect. Uh. And then

56:59

it got h impetus uh

57:02

from uh The Rebel

57:05

without a Car James Dean, where

57:08

he fashionably wore blue jeans

57:10

for the whole movie, and it

57:12

had that was a powerful narrative that

57:15

that movie was admired.

57:17

Right. He died in a crash

57:20

driving a Porsche like a month before

57:22

the movie came out. Kind of that kind

57:24

of made the movie go viral, didn't it. Yeah,

57:27

it depends on things like that. Becoming

57:29

assassinated helps your narrative,

57:32

or murdered or or or die in a accident

57:35

that reveals your reckless side, which

57:37

is what James Dean did. He was

57:39

speeding, right, and that was part of the

57:42

character in the film. Yes,

57:46

Uh, it was. It was a good movie resonated.

57:50

Um. So, So the other thing I had

57:52

to ask you about was on

57:55

expectations um. Pedro

57:57

Domingos is a machine driven linguisting

58:01

linguistic processing expert at

58:04

Hedge Fund daw And and his

58:06

quote, emerging narratives

58:08

determine expectations, and expectations

58:11

determine everything else. How

58:13

important are expectations to to

58:16

narratives? Right? Well, I think, uh,

58:18

this is older tradition and economics

58:21

where people would ask people, what what do you expect

58:23

the inflation rate to be this year? Uh?

58:26

George Katona, who was a founder

58:29

of the Michigan Consumer sentiment Well,

58:31

one of the founders of the Michigan Consumer said

58:34

that he interviewed people and I talked to them directly,

58:36

and he would ask them, what do you think the inflation

58:38

rate will be this year? And he got

58:41

the impression he said that people

58:43

don't really Uh, they looked

58:45

lost, what what is the inflation

58:47

rate? I don't have any

58:50

clear idea And then if

58:52

he pressed them, they'd come up with a number. So

58:55

he said, they don't exactly have expectations.

58:58

But maybe a lot of people

59:00

don't. Um, but maybe

59:03

it's uh, it's more like stories

59:05

about they heard

59:08

that the price of something went

59:10

up over

59:12

the last year and it's been doing that Uh.

59:16

And so they're upset and they're angry. Uh

59:19

and uh, they can talk like that. If

59:22

you force them to do it, then they'll just say, Okay,

59:24

my expectation is ten percent. But

59:27

they didn't have it. Someone once

59:29

said that the reason oil

59:32

and guessoline prices are

59:34

so important to people's expectations

59:36

inflation expectations is it's

59:38

the only product you buy that the

59:41

price is displayed in toll

59:44

numbers on fort toll signs,

59:46

and so you everybody sees it. You can't help

59:49

but notice it. How

59:51

important is that too? Stories of

59:54

prices rising or fall. Yeah,

59:57

So visual images matter for stories.

1:00:00

Also, a sense of identity matters.

1:00:03

So the inflation problem became

1:00:05

the most serious problem facing the country

1:00:08

according to Gallup polls in

1:00:10

some time in the seventies eighties, maybe

1:00:12

say seventies. Uh. And

1:00:15

we had a very big bout

1:00:17

of inflation during that era. Uh

1:00:21

right, So, but I think that what I was

1:00:23

gonna say is that it not only affected

1:00:26

people's lives

1:00:29

directly, but it also made them angry.

1:00:31

And they started blaming labor unions

1:00:34

for the inflation, for bidding up, for

1:00:36

forcing companies to wage price raise

1:00:38

prices in order to pay the higher

1:00:41

wages they were paying the unionized members,

1:00:43

and it led to a public reaction

1:00:45

against unions, and it led to

1:00:48

ultimately to Ronald

1:00:50

Reagan and a

1:00:52

general diffusing of the power of

1:00:54

unions. Now by the time the

1:00:57

seventies and eighties came around, hadn't

1:00:59

unions have been fooling for for

1:01:01

some time? Well? I don't. Yeah, when I when

1:01:03

I named Ronald Reagan, I don't

1:01:06

mean that he invented the narrative. He

1:01:08

was uh. He good politicians

1:01:11

know that they can't routinely

1:01:13

invent there. You can you can add some um

1:01:18

similar narratives that strengthen it, but

1:01:20

you have to accept that people are onto a certain

1:01:23

story. And to be a successful politician,

1:01:26

you want to, uh, you want

1:01:28

to repeat the story. So he

1:01:30

fired the air traffic controllers when

1:01:33

they went on strike, which I believe was

1:01:35

the first time something like that had happened. That

1:01:38

played right into the we're not going to take

1:01:40

it from unions anymore narrative,

1:01:44

right, So he knew how to create a new narrative

1:01:46

built around a emerging narrative,

1:01:48

so it would become part of a constellation

1:01:50

of anti union narratives, and

1:01:53

and that had an impact on prices or

1:01:55

just public perception of that

1:01:58

was a major turning point, now just for the US,

1:02:00

but around much of the world, that the

1:02:03

inflation rate was up in the double digit

1:02:05

range per year UM

1:02:09

and that it started to come down

1:02:11

right from that date. So these

1:02:14

are big changes in economics. Uh,

1:02:17

events that are narrative driven. So

1:02:19

economists tend often to be focused

1:02:22

on predicting month to month

1:02:24

fluctuations. Uh, and

1:02:27

not why did there why was there a global

1:02:30

peak and inflation around? And

1:02:34

that I think has to be understood through changing

1:02:37

narratives. Now, I would credit Paul Vulcar

1:02:40

and his actions is fed chief raising

1:02:42

rates double digits in order

1:02:44

to break the back of inflation. But you're

1:02:46

suggesting the narrative favors

1:02:49

what Ronald Reagan did. Well,

1:02:51

I think they both were important.

1:02:53

Fact isn't. It's a complicated story. But

1:02:56

Voker might not have had the political

1:02:59

cap to do that

1:03:02

if if the public wasn't

1:03:04

already angry about inflation. So

1:03:07

it was a it was a courageous

1:03:09

thing for him two to

1:03:12

create the Great Recession it

1:03:14

was called at the time, uh in

1:03:17

in the nineteen eighties. Uh. But

1:03:19

he he was judging. I think that

1:03:22

he did have these uh that

1:03:24

people were angry about that there've

1:03:26

been all this talk about controlling inflation.

1:03:29

Uh, and it just gets worse and worse. And

1:03:32

they also believe this was part of the popular

1:03:34

narrative then that it eats

1:03:36

into my wallet. They didn't.

1:03:39

They didn't think as many economists

1:03:41

did that it would it would

1:03:43

get into their paycheck as well, even

1:03:45

though they weren't unionized by uh

1:03:49

by market forces. Huh.

1:03:51

Quite quite interesting. So now let me get

1:03:54

to my favorite questions that we ask

1:03:56

all of our guests. This is sort of

1:03:59

our speed ounds. Feel free to

1:04:01

go is as short, uh as you

1:04:03

want? Tell us the first

1:04:05

car you ever owned. You're making model.

1:04:09

My parents gave me a Rambler

1:04:12

Ambassador in the nineties

1:04:15

sixties because it was a safe

1:04:17

car. And I don't follow my

1:04:19

parents too much in detail, but I've

1:04:22

been buying safe cars ever since. I

1:04:24

recall taking a cab with you once and in the back

1:04:26

seat you put on the seatbelt.

1:04:28

I don't know a lot of people do that, um from

1:04:31

a safety perspective. Not the

1:04:34

Rambler, by the way, not the Porsche Speedster

1:04:36

that James Dean, that's right, I'm

1:04:38

not a James Dean Duke. Um, what's

1:04:41

the most important thing people do not

1:04:43

know about Bob Schiller? So?

1:04:46

Uh, I don't know what's important about

1:04:48

me? Uh? Is it something about my

1:04:51

personality? What? What do people

1:04:53

not know about you? Uh?

1:04:56

Well, I okay, I'm thinking, Uh,

1:05:00

this is just off the wall thought. But uh,

1:05:02

I think people differ in their

1:05:05

um uh, their

1:05:08

ability to focus attention, and

1:05:11

their ability to complete

1:05:13

projects. I think I did.

1:05:15

I was a project oriented

1:05:18

person from childhood, but

1:05:21

distractable. My secretary

1:05:23

will tell you I'm distractable, but

1:05:25

I keep coming back. So I think

1:05:28

that people like me should do

1:05:30

things like write books. And

1:05:33

this is what your six book? Your

1:05:36

how it could be? I say

1:05:38

tenth book? Um?

1:05:42

Who were your early mentors who affected

1:05:44

your career? Be it in academia or

1:05:47

economics? Okay?

1:05:50

Um in elementary

1:05:52

school, I don't know his first name. Mr Keener

1:05:55

is my science teacher, and

1:05:58

he encouraged me I wanted to be a sign dentist.

1:06:00

Really I am a social scientist.

1:06:03

And also my

1:06:05

high school geometry teacher,

1:06:08

Mr Sucy I think it was Roger Suci

1:06:10

and now know his first name? Who uh

1:06:13

encourage me about mathematics and

1:06:16

I wrote a extra paper

1:06:18

for his course, which he didn't even ask for, in

1:06:20

which I use the differential calculus

1:06:22

to derive a formula

1:06:25

for the length of a spiral, And

1:06:27

he was so encouraging. You're doing

1:06:30

original mathematics. I assume somebody

1:06:32

else has already done that, but I don't

1:06:34

know where. I assume I got it

1:06:36

right. I don't know, so

1:06:39

um, tell us about some of your favorite books.

1:06:41

You've mentioned numerous books so far. What

1:06:44

what books do you really enjoy? What do you read

1:06:47

for pleasure or fun? See?

1:06:50

One thing is that I am distractable,

1:06:52

so I often don't finish them. I

1:06:55

jump around and look for interesting places.

1:06:57

Are you reading like three or four books at once? What

1:07:00

I'm doing right now? It's strange.

1:07:03

I bought in an antiquarian bookstore

1:07:06

a bound volume of for

1:07:08

eighteen forty nine of Little

1:07:11

Living Age ever heard of it? It

1:07:13

was an intellectual magazine like the Atlantaker

1:07:16

Harper's from that time,

1:07:19

and I thought, I'll just, you know, every night,

1:07:21

I'll read one issue of it. Uh,

1:07:24

And it just brought me, brings me into the year

1:07:27

eighteen forty nine. I'm letting them decide

1:07:29

what I read. Do you do you I

1:07:32

make discoveries about the path. For example,

1:07:35

I discovered that women's liberation was

1:07:37

already I just read a story

1:07:39

about famous women

1:07:42

poets in that in that volume

1:07:44

in eighteen forties eighty nine. Yeah,

1:07:47

and they didn't mention Emily Dickinson.

1:07:49

So then I looked it up. She was only nineteen

1:07:52

years old in eighteen forty nine. What

1:07:55

what are the books have you? What? What do you like to

1:07:57

recommend to people? What or what book

1:08:00

just resonated with you? So I don't know if I recommend

1:08:03

books very often, But I like autobiographies

1:08:07

are of diaries. So the autobiography

1:08:09

of Benjamin Franklin influenced

1:08:12

me. Uh, He's autobiography,

1:08:14

not somebody else's biography life.

1:08:17

Uh. And the

1:08:20

diary of um uh

1:08:24

the name the version wrote the like of

1:08:27

of Samuel Johnson, James Boswell,

1:08:30

Uh and

1:08:33

uh, I just like real thing. I like to hear

1:08:36

people from the past talk to me. That's

1:08:39

what little the living age is doing for me. And

1:08:42

having people from the past, I want to go

1:08:44

back there and hear them. So

1:08:47

James Boswell his own autobiography,

1:08:50

Yeah, in fact it was written on a daily It's really

1:08:52

a diary what he did today

1:08:54

and he did a lot of things

1:08:57

that were not entirely moral. He

1:09:00

didn't plan to publish it, apparently

1:09:03

from the standards of his age. Um,

1:09:06

but he was an overall a nice person.

1:09:09

Um. What do you do for fun? What do you do when you're

1:09:11

not researching and writing your own books?

1:09:15

Uh? I read things. I

1:09:18

sit with my wife. Now I'm watching television

1:09:21

more. But it's whatever she chooses. What

1:09:23

sort of stuff are you watching on TV? Or

1:09:26

things like John Oliver and uh

1:09:30

oh, the PBS News Hour. These are her

1:09:32

choice. But I liked them too, So that's

1:09:35

interesting. Tell us about a time you failed

1:09:38

and what you learned from the experience. Well,

1:09:42

I I had a firm called Macro

1:09:44

Markets that failed,

1:09:47

but it didn't completely fail. It went under,

1:09:50

it uh collapsed. It's

1:09:53

no longer in exist, but it did

1:09:55

leave a legacy, which was

1:09:57

what well we We wanted to create

1:10:00

markets for real estate, and

1:10:04

there still is. The Chicago Mercantile

1:10:06

Exchange still has a market

1:10:08

that we helped them create based

1:10:10

on the SMB Case Schiller home

1:10:13

Price now Core Logic home

1:10:15

price industry. So I think

1:10:18

what we did change the world, and

1:10:20

even if it didn't make us rich. See part

1:10:22

of the inspiration. It's part of the pleasure. I'm

1:10:25

living out my father's dream, who wanted

1:10:27

me to be an entrepreneur. There's something

1:10:30

about creativity that is

1:10:33

rewarding even if the business doesn't

1:10:35

succeed. Well, you

1:10:37

created the cape ratio, and I know there

1:10:40

are a number of mutual funds based on that. There

1:10:42

are that that's fairly entrepreneurial,

1:10:44

right. Uh, yeah,

1:10:47

I I have the American

1:10:50

it's not just American, the entrepreneurial spirit

1:10:54

that I got from my

1:10:57

father. Um, what

1:11:00

do you most optimistic and or

1:11:03

pessimistic about today? I

1:11:07

don't like to be too pessimistic, and

1:11:09

I'd like to do that. Uh, but

1:11:12

I am worried about things like global warming

1:11:14

and possible possible

1:11:18

crisis in the planet. Uh.

1:11:21

You know, we don't like to think about these things. I

1:11:24

think we should be more concerned

1:11:26

about making agreements with other

1:11:28

countries about how we're going to handle h

1:11:31

environmental crises like global

1:11:34

warming. We might not be able to see

1:11:36

them now and identify them, but we should have some

1:11:39

risk sharing agreements. What are

1:11:41

we gonna do if global warming gets

1:11:43

so bad, for example, that

1:11:46

some country is unlivable, where

1:11:48

do they go? You know who wants to take them

1:11:50

in. That's the problem. That sounds

1:11:53

like quite the problem. Um. So,

1:11:55

if one of your students

1:11:58

came to you, or a millennial came to you when

1:12:00

I was looking for career advice about

1:12:03

working in the field of either

1:12:05

behavioral economics or finance,

1:12:08

what sort of advice would you give them? Well,

1:12:11

this would be very general. I think that, Uh,

1:12:15

finance is an important field I teach. I

1:12:17

have an online course that's free, by the way. On course

1:12:19

there are called financial markets. And

1:12:22

I'm very proud of that because I have

1:12:25

educated so many people, not just from

1:12:27

Yale, but from all over the world who went

1:12:29

into finance. So I think finance

1:12:32

is a good field because it solves

1:12:34

problems. Uh. And it's

1:12:36

not the government solving problems,

1:12:39

although it can also be. There's government finance

1:12:41

as well. Uh. And behavioral

1:12:44

finances just finance coming into reality,

1:12:48

I think uh. Uh,

1:12:51

it's not as behavioral finance

1:12:53

is not a job category like finances.

1:12:57

UH. But I think in order to be well rounded,

1:12:59

when should know something about it. I tell

1:13:02

my students, UH, in my course financial

1:13:05

markets, even if you don't

1:13:07

want to go into finance, you should take

1:13:09

this course because finance is about

1:13:11

making things happen realistically.

1:13:14

How do you finance activities

1:13:16

that are useful for society? Quite

1:13:19

interesting? And our final question, what

1:13:22

is it that you know about the world of economics

1:13:24

and narratives today that you wish

1:13:26

you knew forty years ago? Uh?

1:13:32

I think I'm stalling on this one. I wish

1:13:35

I knew everything that had come up. And

1:13:37

there's so many details and uh

1:13:39

one one thing. I just visited the Behavioral

1:13:42

Insights team in UM the

1:13:44

UK last week and

1:13:46

very impressed with all the things. But not

1:13:49

now. These are sprouting up everywhere. They're they're

1:13:51

they're consulting groups effectively that

1:13:54

help people, uh do

1:13:56

their they're financing more

1:13:59

effectively in account of of

1:14:02

what we know, and there's so much not

1:14:04

a lot of it is experimental, and

1:14:07

uh, you have to try things out and

1:14:10

see what how people react because how

1:14:12

people react is not for

1:14:14

not mostly predictable based

1:14:16

on just the first theory. Quite

1:14:19

interesting. Thank you, Bob for being so generous

1:14:21

with your time. We have been speaking with

1:14:23

Professor Robert Schiller of Yale University.

1:14:26

His new book, Narrative Economics,

1:14:29

How Stories Go Viral and Drive

1:14:31

Major Economic Events was released

1:14:33

on October one, If you enjoy

1:14:36

this conversation, we'll be sure and look up an

1:14:38

inch or down an inch on Apple iTunes

1:14:40

and you can see any of our prior

1:14:43

two hundred and fifty or so conversations

1:14:45

we've had over the past five years.

1:14:48

We love your comments, feedback

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and suggestions right to us at m

1:14:53

IB podcast at Bloomberg dot net, Go

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to Apple iTunes, give us a nice review. We

1:14:57

really appreciate that. I would be remin

1:15:00

us if I did not think the crack staff that

1:15:02

helps put this together each week.

1:15:04

Attica val Broun is our project director,

1:15:06

Michael Boyle is our

1:15:09

booker slash producer, Caroline

1:15:11

Ria is our audio engineer

1:15:14

today, and Michael bat Nick

1:15:16

is my head of research. I'm

1:15:19

Barry Ritolts. You've been listening to Masters

1:15:21

in Business on Bloomberg Radio.