Why we keep falling for pessimism and how stories impact the economy

Negative headlines grab our attention instantly. Bad events or stories create fresh and dramatic headlines and provoke emotions of fear and often make us worry and lose confidence. But why fall, headfirst, for the negative narrative, when in fact we have plenty of reasons to be optimistic?

Pointing out the good and the extraordinary

If you are a teenager today, you may take for granted the exceptional technical and medical progress made over the last 50 years. The long period of post-war peace has led to more economic growth, more social equality, more access to (better) education and much better odds for any of us to fight off disease and live longer. If 50 years sounds a few years too many, you only have to look 15 years back – maybe to the year you were born - to see what incredible advances have been made since then; from the iPhone and the metaverse to electric cars and vaccines against Covid (a disease that 50 years ago may have killed many more people); from quantum computers, virtual exercise and space travel to plant based beefburgers and fabrics made from food-waste. And last but not least, the longest bull-run in the US stock-market. The list is endless and enough to cheer anyone up.

But pessimism is so much more seductive

Pessimistic narratives, nevertheless, seem to win the day. Optimism, on the other hand, is perceived as naïve, as not understanding risk and as not being serious. Pessimism just sounds smarter. Pessimism – in short – is intellectually more captivating. This is particularly relevant in the field of Economics: stories of impending economic decline, uncontrolled inflation or a potential stock market crash, are powerful forces in economies, many of which today are largely based on retail consumption and hence on how confident you and I feel about spending money. Pessimism paralyses, it stops us in our tracks.

The effect of stories on our economic behaviour is called ‘narrative economics’, a term coined by Robert Shiller, a professor of Economics at Yale University. Narrative economics aim to measure the impact of stories on the level of consumer confidence. That stories impact us is clear form the simple fact that – at this point in time - despite a bumper GDP growth in 2021, our economic confidence is low.

Contextualising narratives

To decipher negative narratives, we could contextualise what we hear and read and apply some critical thinking, allowing us to start seeing the wood for the trees and to rediscover some necessary optimism. Ask yourself if things are really as bad as they are presented? Should we really worry? Today, actually, quite the opposite is true: the US economy, for example, is stronger and bigger than it has been for 40 years and unemployment is at a historical low. The UK and Europe also show unprecedented GDP expansion and more people are in work than have been in a long time. Despite all this good news, we are told stories about inflation (bad) and interest rate hikes (bad), leading to a big drop in consumer confidence in most Western economies in January 2022.

But what if we would hear and read instead that is easier to find a job today than it was 3 years ago, that wages are higher, that we will have more money to spend and that GDP is forecast to grow even more in 2022, would we then accept (contextualise) that - with economies growing at this exceptional rate, there is bound to be more inflation as the bigger GDP and higher wages spur spending? But that, on balance, even with higher inflation (expected to come off its recent supply-chain shock highs) things are fundamentally good, better even than before?

Optimism may be considered foolish; but fool or not, thinking independently, not ‘eating’ the first set of headlines and applying context might be the best thing we can do to keep our outlook fresh and cheerful. There is enough to be optimistic about.

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