Economics is haunted by more fallacies than any other study known to man
– Henry Hazlitt, American economist, 1894-1993
In this week’s column, we continue the discussion from last week’s piece, where I shared my insights on how economists can change the game. This perspective emerged as we delved into the fascinating realm of numbers, economic models, and personal anecdotes. I couldn’t help but question the extent of our reliance on stories.
Stories, with their compelling narratives, have the ability to change our thinking over time, leading to significant economic events. These narratives, often with a moral or a lesson, shape our perceptions and guide our actions.
A voice from the audience interrupted, “But why stories? Why not equations and diagrams?” I believe stories have a unique way of capturing the essence of human experiences. They transcend the confines of equations and diagrams, appealing to our emotions and imagination. When stories go viral and resonate deeply within us, they become catalysts for economic transformations. Therefore, it is essential to study these narratives, trace their history, and understand how they evolve over time.
They nodded in agreement, eager to hear more.
However, I continued that we must also recognise the limitations of stories. They can act as filters, letting through only select pieces of information while obscuring the rest. This repetition of snippets and narratives often oversimplifies reality, painting a distorted picture of the world.
I went on to explain that there’s a saying that every story essentially begins with ‘a stranger came to town.’ Some even argue that there are only seven archetypal stories, as suggested by Christopher Booker’s book: monster, rags to riches, quest, voyage and return, comedy, tragedy, and rebirth. While this is subject to debate, it highlights the tendency of stories to repeat themselves, creating a cycle of familiar tales.”
To illustrate the influence of stories on our lives, I asked them, “If you were to describe your own lives, how would you portray them?”
A murmur of responses filled the air. “A journey!” said one. “A battle,” exclaimed another. “A mess,” chimed a third.
This simple observation suggests that we as humans seek patterns in our lives. We desire a semblance of order amidst the chaos. By turning our lives into stories, we bring structure and meaning to the everyday. Interestingly, no one mentioned their life as a reality TV show, indicating that we wish for patterns but not ones that are entirely scripted or controlled by external forces.
As I delved deeper into the subject, I cautioned against the dangers of overly memorable and simple stories. I cited the uncertain accuracy of stories circulating about a boutique airline and casino. And let us not forget that stories thrive on simplicity. To serve their purpose, stories must be easily understood, shared, and remembered. However, this simplicity often leads to a distortion of reality with biases hidden within the compelling narratives, subtly influencing our perceptions without our conscious awareness.
Of course popular books on cognitive biases like Nudge, Sway, and Blink may address some of these tendencies, but they tend to overlook one critical bias which is our vulnerability to stories. Ironically, some treat these books as charms to ward off irrationality. While we are drawn to pessimistic views that prepare us for the worst, it is a fallacy to believe that merely owning such books makes us wiser.
I remember a conversation with an investment banker who said that those with some financial literacy often make the worst financial mistakes, while those who acknowledge their lack of knowledge tend to fare better in the long run. This serves as a reminder that even when we think we understand the story, we may still fall victim to its traps.
Furthermore, stories have the potential to be manipulated by advertisers and marketers. They package their products with enticing narratives, making us believe that we are receiving a captivating story for free. However, in reality, we are being seduced into purchasing their products.
Consider two stories about cars: Story A says, “Buy a Honda car, and you’ll attract beautiful, romantic partners and lead an exciting life.” Story B, on the other hand, says, “You don’t actually need a car as fancy as your income suggests. Just buy a reliable Honda.”. The problem lies in the fact that there are more incentives to promote the glamorous narrative, even if it is not in our best economic interest.
Hence, we should approach these seductive narratives with caution and pay attention to the less glamorous stories that nobody profits from telling.
Yet, despite the pitfalls and biases associated with stories, we should not discard all our books and burn our tales. Thinking in terms of stories is an intrinsic part of being human. Stories help us make sense of our actions, give meaning to our lives, and establish connections with others. They possess the power to inspire, motivate, and shape our worldview. For instance, Gabriel Garcia Marquez’s memoir, “Living to Tell the Tale,” beautifully illustrates how stories can shape a life.
As economists, we seek to understand the intricacies of decision-making, we must remain focused on the margins — the small choices that make a significant impact. Should we rely more or less on stories? Should we approach them with increased scepticism? Which types of stories demand caution?
The answer may surprise you. The stories we should be most sceptical of are often the ones that we find most rewarding and inspiring. These are the stories that conveniently overlook opportunity costs and ignore the economic principles, unintended consequences of human actions because these nuances do not fit neatly into compelling narratives.
As much as we are drawn to tales of triumph, struggle, quests, and the arrival of strangers, we must exercise caution as economists. The captivating allure of stories should not blind us to the messy and intricate reality of life. It is crucial to maintain a strong scepticism and remember that the most accurate stories are often the least satisfying ones.
