tag:theconversation.com,2011:/us/topics/sentiment-35263/articlessentiment – The Conversation2018-05-09T11:06:53Ztag:theconversation.com,2011:article/963052018-05-09T11:06:53Z2018-05-09T11:06:53ZYour Spotify history could help predict what’s going on with the economy<figure><img src="https://images.theconversation.com/files/218265/original/file-20180509-4803-n8rhh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/chilling-digital-device-headphone-relaxation-audio-362657822?src=4lBSRy5X4pJ1Y5aAYFGScw-1-37">Shutterstock</a></span></figcaption></figure><p>The Bank of England’s chief economist, Andy Haldane, <a href="https://www.bankofengland.co.uk/speech/2018/andy-haldane-centre-for-data-analytics-for-finance-and-macro">has urged</a> his colleagues to examine the musical mood of the nation when contemplating changes to the bank’s interest rate. How could an increase in <a href="https://www.theguardian.com/business/2018/apr/30/music-downloads-can-gauge-consumer-vibe-bank-of-england">Taylor Swift downloads</a> or a decline in the popularity of rock and roll be relevant for managing the economy? </p>
<p>It all comes down to measuring economic sentiment. This is a way of gauging how people feel about the economy, which behavioural economists use to make predictions about how it will respond to different policies. For example, if people are generally pessimistic about the economy then raising interest rates might encourage them to stop borrowing and spending by so much that it harms the economy.</p>
<p>For some time, researchers have been able to measure economic sentiment by analysing the language used in large numbers of online <a href="http://dx.doi.org/10.2139/ssrn.2504147">news stories</a> and <a href="https://www.sciencedirect.com/science/article/pii/S187775031100007X">Twitter posts</a>. But recently, <a href="https://www.researchgate.net/publication/323560860_The_Rhythm_of_Markets">researchers from Claremont Graduate University</a> have shown that sentiment may be extracted from pop music top-100 lists and music platforms such as Spotify. What’s more, these new sentiment indicators are at least as useful as conventional surveys of consumer confidence.</p>
<p>The idea is that songs have an emotional component that anyone can relate to, encoded in musical attributes such as the songs’ energy, tempo and volume. Online music services such as Spotify already use these kinds of attributes to categorise songs and <a href="https://qz.com/571007/the-magic-that-makes-spotifys-discover-weekly-playlists-so-damn-good/">recommend new music</a> to users based on similar tracks they have already listened to.</p>
<p>You can also understand the emotions expressed by songs from their lyrics, depending on your cultural background. These can be analysed using the same “natural-language processing” software that is used to assess the language of news and Twitter feeds.</p>
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<img alt="" src="https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">All songs have emotional attributes.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/20-december-2015-istanbul-turkey-spotify-353400926?src=4qqUH46oIfFfHRj1t8B9Ew-1-58">Shutterstock</a></span>
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<p>This can be done in a simple fashion, encoding words’ positive or negative emotional loading, or more elaborately by matching words <a href="http://saifmohammad.com/WebPages/NRC-Emotion-Lexicon.htm">to eight core emotions</a>: joy, sadness, anger, fear, disgust, surprise, trust and anticipation. The software then counts up the number of times each emotion is cued within a song’s lyrics.</p>
<p>By identifying the emotional components of the most popular songs, researchers can put together a picture of listeners’ own feelings and use this to predict economic sentiment. Running the emotion mapping exercise on all songs in a top-100 chart captures the lion’s share of new music being purchased and listened to on a month-by-month basis.</p>
<p>This is where the advantages of using “big data” from large numbers of people come to the fore. Survey results only tell you what people who have chosen to participate want you to know. Music charts, on the other hand, reflect actual consumer choices from a much wider group of people.</p>
<h2>Emotional downturn</h2>
<p>The Claremont researchers <a href="https://www.researchgate.net/publication/323560860_The_Rhythm_of_Markets">applied this technique</a> to charts from before and after the 2008 global economic crisis. They found that, after the crash, the frequency of words associated with anger and disgust increased while the frequency of words associated with trust decreased. This type of evidence strongly suggests that music consumers’ states of mind do have a bearing on what music they choose to pay for and listen to.</p>
<p>This research and Andy Haldane’s comments suggest that both the music and lyrics of popular songs can indeed be used to predict economic sentiment, and even short-term stock market movements. Streaming services such as Spotify and Apple Music are sitting on data that could help build a far more detailed map of economic sentiment than top-100 lists. Because these companies have data on individual households, we could even create sentiment indexes for different regions and groups of people (for example, based on how much they earn).</p>
<p>Calling for economists to consult the musical mood of the nation may seem somewhat surprising, bizarre even. But research suggests that the big data approach to tracking consumer sentiment really could be useful. It is just one aspect of the Bank of England’s general drive to broaden and diversify the sources of information it consults in its analyses and decision making. And that should be welcomed.</p><img src="https://counter.theconversation.com/content/96305/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The emotions associated with trends in popular music and lyrics can predict economic sentiment.Kim Kaivanto, Lecturer in Economics, Lancaster UniversityPeng Zhang, Lecturer in Economics and Finance, Guizhou Minzu UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/739042017-03-08T19:27:10Z2017-03-08T19:27:10ZFace Value: sentiment analysis shows business leaders are positive about the year ahead<p><em>When Australian companies report results they typically include an outlook statement from the business’ leaders, giving investors some guidance about their expectations for the future. They issue these forward-looking statements with some caution as investors might rely on them, and the law requires that they be based on “reasonable grounds”.</em> </p>
<p><em>The Conversation’s Face Value uses sentiment analysis to try and determine how Australian business leaders are feeling about the future.</em></p>
<hr>
<p>Heads of Australian companies are reasonably positive in their outlook for the rest of the year, according to our analysis of outlook statements of ASX top 100 companies, reporting results in the past month.</p>
<p>We used <a href="https://www.cs.uic.edu/%7Eliub/FBS/NLP-handbook-sentiment-analysis.pdf">sentiment analysis</a> to identify whether these statements were subjective and, if so, whether the opinions expressed are positive or negative. For the analysis here, we used a manually-crafted dictionary of sentiment keywords. Each keyword had a score for subjectivity and positive or negative sentiment. </p>
<p>So in terms of subjectivity score, numbers near zero indicate factual text and larger numbers indicate opinionated text. Sentiment ranges from -1 to 1 with smaller numbers indicating negative sentiment and larger numbers indicating positive. </p>
<p>We compared the outlook statements from February 2017 to those of the same month in 2016 and the sentiment was stronger in retailing than any other sector (chart below) and had doubled in strength since 2016 when it was not the strongest sector. </p>
<iframe width="100%" height="950" scrolling="no" frameborder="yes" src="https://public.tableau.com/views/SentimentAnalysis2017/Dashboard3?:embed=y&:display_count=no&:showVizHome=no"></iframe>
<p>Strong retailing sentiment reflects households spending more due to low interest rates and some additional wealth generated from rising house prices. The job market has been steady, with unemployment <a href="http://www.abc.net.au/news/2017-02-16/unemployment-jobs-abs-data-january/8276040">falling slightly</a> in January to 5.7%, although this was due to a rise in part-time rather than full-time jobs. </p>
<p>It seems that sluggish wage growth has apparently not hurt retailing sentiment – the wage price index, a measurement of wages, has struggled to keep pace with inflation, <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mediareleasesbyTopic/955FBDF6A933C1FDCA2568A900136286?OpenDocument">growing at 1.9%</a> during calendar 2016 and likely to remain soft in 2017. Yet consumers have maintained their retail spending by <a href="https://www.rba.gov.au/speeches/2017/sp-gov-2017-02-22.html">cutting back their saving</a>.</p>
<p>Leaders of companies in the pharmaceuticals, biotech, telecommunication and software sectors were positive again in 2017 with their outlook statements. This could be driven by <a href="http://www.pwc.com/gx/en/pharma-life-sciences/pharma2020/assets/pwc-pharma-success-strategies.pdf">long-term factors</a> such as Australia’s ageing population and associated demand for medicines. </p>
<p>Those in the real estate sector were also positive this year and sentiment improved from 2016, this is likely to be driven partly by buoyant residential and commercial property markets. This is characterised by declining vacancy rates, rising demand for properties and supply constraints.</p>
<p>Sentiment was weakest in the utilities and energy sectors in 2017, this could be because of the market prospects for electricity, gas and oil. Difficulties in the electricity sector in terms of price and reliability of supply have become almost daily news, and policy uncertainty would contribute to the negative sentiment on what the year might bring.</p>
<p>Sentiment in the energy sector deteriorated from 2016 to 2017 reflecting the <a href="https://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-er-2017-oil-and-gas-industry-outlook.pdf">ongoing downturn in the oil and gas sector</a>. Weak oil and gas prices are driven by long-term factors such as the boost in supply from the shale oil production and the growth in renewable energy supported by governments around the world. These factors are not going away any time soon.</p>
<p>In the outlook of banking and financial companies the sentiment has declined in 2017 relative to 2016, as the industry continues to be <a href="http://www.pwc.com.au/publications/assets/major-banks-analysis-11-nov-2016.pdf">pressured</a> by slowing credit growth, falling net interest margins and rising bad debts, as well as regulatory uncertainty.</p>
<iframe width="100%" height="950" scrolling="no" frameborder="yes" src="https://public.tableau.com/views/SentimentAnalysis2017/Dashboard1?:embed=y&:display_count=no&:showVizHome=no"></iframe>
<p>It’s important to note the subjectivity of these outlook statements, whether they might represent opinions rather than objectively verifiable evidence. This could be an issue, for example, in the retail sector. </p>
<p>Some retail companies such as Harvey Norman and JB Hi-Fi scored the highest for subjectivity, indicating a lot of opinion in the outlook statements, despite the positive sentiment. Also a few oil and gas companies, with quite negative sentiment, also scored highly for subjectivity. One of the highest subjectivity scores was for Caltex.</p>
<iframe width="100%" height="950" scrolling="no" frameborder="yes" src="https://public.tableau.com/views/SentimentAnalysis2017/Dashboard6?:embed=y&:display_count=no&:showVizHome=no"></iframe>
<p>Overall however, the positive sentiment in the recent company reporting season is consistent with a range of favourable macroeconomic drivers. The Australian economy is <a href="http://www.rba.gov.au/speeches/2017/sp-gov-2017-02-24.html">expected</a> to grow by around 3% over the next two years. </p>
<p>Mining investment is expected to stop declining, at least if not rise, in the near future. The rise in commodity prices over the past six to 12 months is expected to hold up. </p>
<p>The election of US President Donald Trump and the British exit from the European Union (Brexit) inspired a <a href="http://www.marketindex.com.au/all-ordinaries">bounce in stock markets</a>, this reflects an optimism about the forecast economic impact of these events. In the case of Trump, an infrastructure and tax cut inspired boost to investment spending; and in the case of Brexit, more due to popular optimism about reclaimed sovereignty than rational evidence <a href="https://woodfordfunds.com/economic-impact-brexit-report/">about real economic effects</a>.</p>
<p>Other drivers <a href="https://19-acci.cdn.aspedia.net/sites/default/files/uploaded-content/field_f_content_file/auschamberwestpac2016q4.pdf">include</a> the low Australian dollar, at least lower by 28% from the highest level in 2013. This helps make export and import competing sectors more competitive, which is reflected in a boost in exports and a rise in building and renovation activity. This is also driven by the prospect of ever-increasing real estate prices in our two largest capital cities.</p>
<p>The positive sentiment outlook here also resonates with a range of other positive business confidence analyses over recent months. The <a href="https://au.investing.com/economic-calendar/nab-business-confidence-217">NAB business confidence survey</a> in February reports positive and strongly improving business conditions. The <a href="http://www.roymorgan.com/findings/7138-roy-morgan-australian-business-confidence-january-2017-201702081623">Roy Morgan monthly business confidence</a> index rose 2.4% in January. </p>
<p>The most recent <a href="https://www.aigroup.com.au/policy-and-research/economics/economicindicators/">Ai Group Indices for Services and Construction</a> were both strong and indicate expansion of these sectors. And the <a href="https://19-acci.cdn.aspedia.net/sites/default/files/uploaded-content/field_f_content_file/auschamberwestpac2016q4.pdf">Australian Chamber-Westpac survey of industrial trends</a> strengthened at end 2016 by almost 5% from the previous quarter.</p>
<p>The above analysis is perhaps a glass half-full viewpoint. Yet we can also point to the ultimate forward looking indicator of the Australian economy – the Australian stock market – as further evidence of good times ahead. The All Ordinaries index of Australian shares was 5811 points on 8 March, an increase of 12% at the same date in 2016. That points to a positive outlook for Australian companies and therefore ultimately for all Australians through their wages, dividends earned by their superannuation funds, and taxes collected by the Australian government on behalf of all households.</p><img src="https://counter.theconversation.com/content/73904/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ben Hachey is an employee of and has been granted stock options in Hugo.ai. Ben has received funding from the Australian Research Council, the Capital Markets CRC and Google. He is Secretary of the Australasian Language Technology Association.</span></em></p><p class="fine-print"><em><span>Ross Guest does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Face Value analyses the sentiment of business leaders in ASX top 100 companies and for 2017 it seems positive, although sometimes highly opinionated.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityBen Hachey, Honorary Associate, School of Information Technologies, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/718132017-02-03T02:53:35Z2017-02-03T02:53:35ZHow storytelling drives finance and economics<figure><img src="https://images.theconversation.com/files/155421/original/image-20170203-1680-p8z69y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Stories can have a profound effect on our behaviour.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>In his recent <a href="https://www.aeaweb.org/conference/2017/preliminary/1626?sessionType%5Bsession%5D=1&organization_name=&search_terms=shiller&searchLimits%5Bauthor_last%5D=1&day=01-07&time">presidential address to the American Economic Association</a>, Nobel Laureate Bob Shiller drew attention to the importance of narratives in economics and, particularly, in financial markets. This corroborates <a href="https://espace.library.uq.edu.au/data/UQ_415865/s42061609_phd_thesis.pdf?Expires=1485399771&Signature=Hjw9E7-R32g%7EJhOyrZBsYUkWCK1NQf4a3KEeAy5hB-ZbupW5DbRJFV%7EJc2MueXjcmGHongMPvKFZGSMEP8yFr%7EV9XHHaJeGPIK8WNWiKN%7EN8hST1HaeO63xGT7oDx-0n9w3FfMC-zArqiOer-OmWKlX%7EJhr27RMp23daN%7EaRGWeuf37Fdv4dNhM4QbCBrMTaHAYGMMMUsp%7EcIUVs-y2d8%7E7trlZsuw3ivVD3ClinaGuL0jQ3cKehOf1Zc4cL8J9%7ENAKnryME2VAU7I8vL1hZ-rsMASlTPOhrXttioxASTOdH72dyhYdSLqeSEo9bATVmEudNg17LSObhcmuvYklruQ__&Key-Pair-Id=APKAJKNBJ4MJBJNC6NLQ">some recent research by the author and colleagues at the University of Queensland</a> into the psychology of economic behaviour.</p>
<p>When we tell ourselves stories, we link up a number of different events into a coherent whole. In financial markets and across the economy as a whole, these stories not only affect expectations but <em>are</em> expectations. And expectations shape behaviour.</p>
<p>Our research shows that the more simple a story, the more it extends and agrees with preconceptions, the more <em>persuasive</em> it is. A good story becomes embedded in investors’ minds; the story <em>becomes</em> the expectation.</p>
<p>If a narrative embedded in the mind of an investor tells a positive story about, for instance, profitability, they will act on it. A positive story results in good news in the financial markets.</p>
<h2>The “Trump bump”</h2>
<p>An example of what might occur when a powerful narrative spreads across financial markets is playing out right now.</p>
<p>The <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5671.0">latest figures</a> from the Australian Bureau of Statistics (ABS) reveal a huge spike in commercial loans last November. Seasonally adjusted, there was a 14.8% increase in commercial finance from the month before.</p>
<p>The strange thing is, this surge occurred at the same time NAB’s Monthly Business Survey <a href="http://business.nab.com.au/nab-monthly-business-survey-november-2016-21010/">showed</a> businesses were “increasingly concerned about the underlying momentum in the economy as evidence mounts that the non-mining economy is losing steam”. </p>
<p>Businesses expecting a sluggish future don’t suddenly go out and borrow 14.8% more money. But we can see in this graph that for much of the year business finance had been flat or declining. Until it wasn’t.</p>
<iframe src="https://datawrapper.dwcdn.net/5wrW8/3/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="400"></iframe>
<p>Now these are aggregate data; they tell us the change in the amount of lending to business done by the financial sector as a whole. Even then, this spike is unusually massive, and therefore in and of itself in want of an explanation.</p>
<p>John Maynard Keynes <a href="http://cas2.umkc.edu/economics/people/facultypages/kregel/courses/econ645/winter2011/generaltheory.pdf">wrote</a> that surges in finance are supported by two factors: relatively cheap credit and expectations of future returns. </p>
<p>Without strong expectations of future returns, no amount of cheap credit can induce businesses to borrow and invest. This is the famous “liquidity trap”.</p>
<p><a href="https://espace.library.uq.edu.au/data/UQ_415865/s42061609_phd_thesis.pdf?Expires=1485399771&Signature=Hjw9E7-R32g%7EJhOyrZBsYUkWCK1NQf4a3KEeAy5hB-ZbupW5DbRJFV%7EJc2MueXjcmGHongMPvKFZGSMEP8yFr%7EV9XHHaJeGPIK8WNWiKN%7EN8hST1HaeO63xGT7oDx-0n9w3FfMC-zArqiOer-OmWKlX%7EJhr27RMp23daN%7EaRGWeuf37Fdv4dNhM4QbCBrMTaHAYGMMMUsp%7EcIUVs-y2d8%7E7trlZsuw3ivVD3ClinaGuL0jQ3cKehOf1Zc4cL8J9%7ENAKnryME2VAU7I8vL1hZ-rsMASlTPOhrXttioxASTOdH72dyhYdSLqeSEo9bATVmEudNg17LSObhcmuvYklruQ__&Key-Pair-Id=APKAJKNBJ4MJBJNC6NLQ">Our research shows</a> that a compelling story – one that extends and agrees with preconceptions – would have been sufficient to overcome the liquidity trap. A mathematical principle called the “Chinese Whispers” theorem indicates that for us to see remarkable and sudden changes in economic systems we must be observing the effects of a powerful narrative supporting positive expectations (i.e. future profitability).</p>
<p>Meanwhile, a concept <a href="https://hbr.org/2007/03/harvard-business-ideacast-33-m">popularly known</a> as “Made To Stick” indicates that a simple story, connecting emotionally charged ideas together while extending and agreeing with preconceptions, is sufficient to become embedded in minds and inform expectations. In our research we demonstrate that this idea is the logical conclusion of a half-century of psychological research on <a href="http://www.simplypsychology.org/cognitive-dissonance.html">cognitive dissonance</a>, <a href="http://changingminds.org/explanations/theories/personal_construct.htm">personality</a> and <a href="http://www.scholarpedia.org/article/Visual_salience">“salience” in perception</a>, as well as some simple mathematics. </p>
<p>You can see this play out in the headlines about the “<a href="https://theconversation.com/whats-behind-the-trump-bump-in-markets-68658">Trump bump</a>”.</p>
<p>Very soon after the Brexit vote and consistently afterwards, Theresa May indicated an eagerness <a href="http://www.telegraph.co.uk/news/2016/07/16/theresa-may-plans-for-brexit-trade-deals-with-the-usa-and-austra/">to strike free trade deals with the US and Australia</a> and <a href="http://www.abc.net.au/news/2016-09-05/g20-turnbull-to-raise-post-brexit-uk-trade-deal-with-theresa-may/7813328">Malcolm Turnbull concurred</a>. And while Donald Trump campaigned on anti-trade policies, these <a href="https://www.donaldjtrump.com/policies/trade/?/positions/us-china-trade-reform">excluded the Anglosphere</a>. </p>
<p>Further, the British economy <a href="http://www.telegraph.co.uk/business/2016/10/27/uk-economy-grows-05pc-in-the-wake-of-brexit-vote-defying-recessi/">did not collapse</a> following the Brexit vote, and Trump’s policy platform included massive <a href="https://www.bloomberg.com/politics/articles/2016-08-02/trump-says-he-ll-spend-more-than-half-trillion-dollars-on-infrastructure">infrastructure stimulus</a>, <a href="http://www.wsj.com/articles/donald-trump-lays-out-more-details-of-economic-plans-1473955537">tax cuts</a> and <a href="http://www.forbes.com/sites/waynecrews/2016/11/22/donald-trump-promises-to-eliminate-two-regulations-for-every-one-enacted/#2630f4db2b87">deregulation</a>. Adding to all this, Congress and the Supreme Court are now Republican.</p>
<p>This is a positive narrative for expectations of future returns, because the Australian economy on the whole does not <em>compete</em> with the US and UK economies. Rather, we help to supply their demand. We have business to gain by participating in a strong Anglosphere economic bloc, and we have little business to lose.</p>
<h2>What do the Mississippi, South Sea and Shenandoah have in common?</h2>
<p>Throughout financial history, there are other examples where powerful narratives have driven the markets. John Kenneth Galbraith, in his history of <a href="http://press.princeton.edu/titles/11004.html">money</a> and the <a href="https://www.penguin.co.uk/books/13545/the-great-crash-1929/">1929 crash</a>, tells us of at least three spectacular ones. </p>
<p>When King Louis XV granted the Mississippi Company the profits of the colony of Louisiana, its share price rose so high it reflated the French economy. In his book, <a href="http://www.penguinrandomhouse.com/books/302900/the-ascent-of-money-by-niall-ferguson/9780143116172/">The Ascent of Money</a>, Niall Ferguson shows us exactly how the narrative about the unbounded wealth of the Louisiana company drove this spread – in pamphlets, cartoons and posters.</p>
<p>When parliament <a href="http://discovery.ucl.ac.uk/1349550/">granted the South Sea Company a monopoly</a> over trade with the Spanish American colonies, its shares became so valuable it was for a time decided <em>it</em>, rather than the Bank of England, should assume responsibility for the British national debt. The fact its merchants would have to run the gauntlet of the Spanish navy all the way across the Atlantic was conveniently ignored, while the story of fabulous riches from the new world captured the attention of investors.</p>
<p>The <a href="https://books.google.com.au/books?id=l-xRKtKEpTwC&pg=PA61&lpg=PA61&dq=shenandoah+corporation,+oversubscribed&source=bl&ots=72m08kutsa&sig=5tI-5lfIQWrhkXV_HQjywiQAJvQ&hl=en&sa=X&ved=0ahUKEwjw47z76vLRAhWFKZQKHXo2CQoQ6AEIMjAF#v=onepage&q=shenandoah%20corporation%2C%20oversubscribed&f=false">narrative of the Shenandoah Corporation</a> beats them all. The initial call for investments was oversubscribed by a factor of <em>seven</em>. Why? Because at that time a story was being told about the ability of fund managers applying “investment science” to obtain amazing returns. </p>
<p>“Trust the experts, they’ll make you a mint” is a simple story, connecting emotionally charged ideas together while extending and agreeing with our tendency to defer to the advice of the “wise men”.</p>
<h2>Ignore the force of narrative at your peril</h2>
<p>Governments and investors ignore the power of storytelling at their peril. The financial markets are not driven by the “mechanics” of interest rates and money alone. They are driven by one of the most ancient traditions of humanity – stories.</p>
<p>We can lead an investor to liquidity, but we can’t make them drink without telling them a story about why it is so very tasty. And if we want to stop them from drinking a really tasty poison, it’s not enough to make the poison a bit harder to get. Either it has to be taken away (verboten), or a simple story, extending and agreeing with preconceptions, has to be told about why poison that tastes really nice is still poison.</p><img src="https://counter.theconversation.com/content/71813/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Brendan Markey-Towler does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>History shows us that narratives play an important role in market behaviour. But new research shows that all it takes is a simple story that matches our preconceived notions.Brendan Markey-Towler, Industry Research Fellow, Australian Institute for Business and Economics and School of Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.