We'll be getting into narrative collapse, disillusionment and hatred as we approach year-end but for now, some background. Following on the study of decision-making-under-uncertainty that was touched on in yesterday's "What John von Neumann Can Teach Us About Risk, Uncertainty, and Edge", a deeper dive with the Institute for New Economic Thinking doing the heavy lifting.
First up, INET's short form review of the book in our title:
- Author(s): Nicholas Mangee
- ISBN: 9781108974899
eBook: Oct 14, 2021
Hardback: Dec. 16, 2021
‘Animal spirits’ is a term that describes the instincts and emotions driving human behavior in economic settings. In recent years, this concept has been discussed in relation to the emerging field of narrative economics. When unscheduled events hit the stock market, from corporate scandals and technological breakthroughs to recessions and pandemics, relationships driving returns change in unforeseeable ways. To deal with uncertainty, investors engage in narratives which simplify the complexity of real-time, non-routine change. This book assesses the novelty-narrative hypothesis for the U.S. stock market by conducting a comprehensive investigation of unscheduled events using big data textual analysis of financial news. This important contribution to the field of narrative economics finds that major macro events and associated narratives spill over into the churning stream of corporate novelty and sub-narratives, spawning different forms of unforeseeable stock market instability.
About the Author
Nicholas Mangee is an associate professor of finance in the Parker College of Business at Georgia Southern University and a research associate for the Institute for New Economic Thinking (INET) program on Knightian Uncertainty Economics (KUE). My research focuses on testing the implications of macro-finance models based on KUE by investigating the relative roles and dynamics between market fundamentals, psychology, and social context in explaining instability in stock price fluctuations. I earned my doctoral degree at the University of New Hampshire. My research has received attention from financial press outlets such as The Economist and Bloomberg News and has been featured prominently in the book Beyond Mechanical Markets: Asset Price Swings, Risk, and the Role of the State - a 2011 finalist for the Paul Samuelson Prize.
And via INET, the first chapter of the book:
How Novelty and Narratives Drive the Stock Market:
Black Swans, Animal Spirits and Scapegoats
Nicholas Mangee
Chapter 1: Stock Market Novelty and Narrative Finance
Where there is novelty, there is instability. Where there is instability there is uncertainty. Where there is uncertainty there are narratives – narratives are the currency of uncertainty. As the first two decades of the twenty-first century have made palpably clear, novel events such as 9/11, the subprime mortgage crisis, the fiscal cliff, the US-China trade war, Brexit, the US corporate tax overhaul of 2017, the COVID-19 pandemic, and the oil market crash of 2020, can lead to dramatic change in the relationships driving stock market returns. The timing and magnitude of instability from such large-scale “macro uncertainty” events are impossible to foresee ex ante and can be difficult to comprehend, even in hindsight. For each nonrepetitive event, investors were forced to abandon precise quantitative prediction and grapple with ambiguity about which forecasting model to place the greatest confidence in as visibility of the future was dim at best.
As evidence presented here shows, narratives about the economy, war, natural disasters, monetary and fiscal policy, social constructs, institutions, culture, political elections and so on, naturally and necessarily become part of investors’ information sets during unprecedented times.
This book advances a view that nonrepetitive events cause instability and Knightian uncertainty (KU) in stock market relationships, forcing narrative-based emotions and cold calculation to be inextricably intertwined under the Novelty-Narrative Hypothesis (NNH)....
....MUCH MORE (25 page PDF)
Professor Mangee introducing the concepts behind the book in this December 2021 article:
Introducing the Novelty-Narrative Hypothesis
Finally, INET's Lynn Parramore with extended commentary:
We have quite a few posts that may be of interest, some of the earlier links are in 2020's
"The Bezos '70 percent rule' for decision-making"
There is a history of Decision Making Under Uncertainty* as a distinct discipline going back to Pascal and his wager and Bernoulli and his Expected Utility vs Expected Value. It is now taught as the heart of Decision Theory and as a cousin of Game Theory.
- Investing: Professor Shiller On The Power Of Narratives
- Professor Shiller on Bubbles, Reflexivity, and Narrative Economics