Why do certain stories seem to take hold in markets, shaping expectations long before the underlying reality becomes clear?

There are periods when a particular idea begins to appear repeatedly. It may start as a simple explanation such as a theme, a trend, or a way of interpreting events. Over time, it shows up in commentary, in headlines, and in conversation. The idea becomes familiar. It is repeated often enough that it begins to feel established, even if the underlying evidence is still evolving.

This is where narrative economics offers a useful lens. It describes how stories, rather than just data, play a central role in shaping economic and financial outcomes. People do not respond to information in isolation. They respond to the way that information is framed, shared, and understood collectively.

The concept was developed by Robert Shiller, who argued that economic behaviour is influenced by the spread of popular narratives, much like the spread of ideas in society more broadly. These narratives can simplify complex realities, making them easier to communicate and remember. As they spread, they begin to influence expectations and decisions.

One of the central insights of narrative economics is that stories can behave like contagions. As they are repeated and reinforced, they gain credibility. More people act on them, which can begin to influence the outcomes those stories describe. Over time, the distinction between explanation and influence becomes less clear.

In markets, this can be seen in the way themes develop and persist. A narrative around technology, inflation, or economic growth can shape how opportunities are perceived. Investors may align their decisions with the dominant story, even when the underlying conditions are more complex or uncertain.

What makes this difficult to recognise is how natural it feels. Stories are a primary way in which people make sense of the world. They help organise information and reduce complexity. The challenge is that when a narrative becomes widely accepted, it can crowd out alternative perspectives, particularly when it is reinforced by price movements or authority.

You may notice this in yourself when certain explanations feel more compelling because they are widely repeated, or when a narrative begins to shape how you interpret new information. There can also be a tendency to favour stories that are simple and coherent, even when reality is more nuanced.

Narrative economics does not determine what is true.

But it can influence what is believed.

For Further Reading

Shiller, R. J. (2017). Narrative Economics. American Economic Review, 107(4), 967–1004.