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Thought leadership

April 07, 2020

30-second reviews

We review insights from behavioural economics books to reconnect you with useful things you might have already read – and help connect those ideas to investor behaviour.

Narrative Economics, Part 2: Panic vs. Confidence

In last month’s review, we discussed Robert Shiller’s timely book, Narrative Economics. In exploring societies’ narratives around spending, saving and investing, Shiller broadens the scope of economics. He incorporates psychology and history into the mix. And he graphs the use of key phrases over time, borrowing from epidemiology. Using case studies and quantitative analysis, he shows how viral narratives peak and decline over short periods, and even mutate and recur decades later.

One of the most apt studies for today’s markets is the chapter on Panic vs. Confidence. Shiller goes back more than a century, examining the stories people told around economic upheaval. In the nineteenth century, newspapers wrote about panics and depressions, but never mentioned consumer confidence. At the time, most working class people spent their entire incomes. They did not send their kids to college or save for retirement. Lifespans were short, and people expected to be cared for by relatives or charities in their old age. As a result, bank failures were widely viewed as problems of the wealthy.

The Panic of 1907 marked the start of the “confidence” narrative, where people assumed that slow economic activity wasn’t just about a particular financial crisis; it was also a general pessimism and unwillingness to hire. During that year, the New York Stock Exchange fell nearly 50% from its previous peak over a three-week period. Runs on banks were spreading. In the absence of a central bank, J.P. Morgan pledged his own money to backstop the banks and persuaded New York bankers to do likewise. Though the financial crises of the period were far from over, Morgan’s bold move likely saved the U.S. from a far more serious depression. This precursor to the Federal Reserve set the stage for the policy responses we are seeing today, more than a century later.

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This document is published by Sun Life Global Investments (Canada) Inc. and contains information in summary form. This document is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by Sun Life Global Investments (Canada) Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.

Information contained in this document has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy. This document may contain forward-looking statements about the economy, and markets; their future performance, strategies or prospects. Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon.

© Sun Life Global Investments (Canada) Inc., 2019.

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