Framing, the Representativeness Heuristic, and the Affect
Heuristic
Narrative psychology also relates to the psychological concept of framing.25 If
we can create an amusing story that will get retold, it can establish a point of
view, a reference point, that will influence decisions. Framing is related to the
Daniel Kahneman and Amos Tversky representativeness heuristic (1973),
whereby people form their expectations based on some idealized story or model,
judging these expectations based on the prominence of the idealized story rather
than estimated probabilities. For example, we may judge the danger of an
emerging economic crisis by its similarity to a remembered story of a previous
crisis, rather than by any logic.
George Katona, one of the founders of behavioral economics and author of
the 1975 book Psychological Economics, noted an odd phenomenon: when he
interviewed common people and asked them about their expectations of key
economic variables, he had the feeling that they had no clear expectations, and
that they made up numbers on the spot to please him. But I would argue that
these ordinary people were thinking about narratives that involved people and
prices. If asked in an interview about their expectations for inflation, for
example, they might not answer the question directly but rather offer a dramatic
story with human interest and with clear moralizing, about politicians’ or labor
unions’ activities that might be related to inflation.
Psychologists have also noted an affect heuristic, whereby people who are
experiencing strong emotions, such as fear, tend to extend those feelings to
unrelated events.26 Sometimes people note strong emotions or fears about
possibilities that they know logically are not real, suggesting that the brain has
multiple systems for assessing risk. This “risk as feelings” hypothesis holds that
some primitive brain system more connected to palpable emotions has its own
heuristic for assessing risk.27
In joint work with William Goetzmann and Dasol Kim, George Akerlof and I
examined data from a questionnaire survey of investors and high-income
Americans since 1989. We found that people have exaggerated assessments of
the risk of a stock market crash, and that these assessments are influenced by the
news stories, especially front-page stories, that they read. One intriguing finding
was that a natural event such as an earthquake could influence estimations of the

likelihood of a stock market crash. The respondents in our survey assigned
statistically significantly higher probabilities to a stock market crash if there had
been an earthquake within thirty miles of their zip code within thirty days,
triggering the affect heuristic. It seems reasonable to hypothesize that local
earthquakes start local narratives with negative emotional valence. Analogous
evidence has indicated that seemingly irrelevant events with strong narrative
potential can affect economic or political outcomes: the World Cup competition
can affect economic confidence,28 shark attacks at local beaches can affect votes
for local incumbents,29 and background music in advertisements can have a
strong effect on consumers.30 Wine stores find buyers purchasing more
expensive wines if the background music is classical versus Top 40.31
An affect heuristic also operates in generating activity by Internet trolls
(people who send nasty or obscene comments on the Internet).32 Trolling
behavior appears to be contagious: an experimental group randomly selected
from the general population was primed with nasty examples of trolling.
Members of that group were then much more likely to post similar comments.

Going Forward
The tantalizing evidence about the impact of narratives from neuroscience and
related observations suggests some entirely different explanations of the severity
of major economic events. In part II of this book we consider some organizing
principles for narrative economics. A key issue is assigning the direction of
causality from dispersed and ill-defined narrative constellations to actual
economic activity, a topic to which we turn in the next chapter. The chapter after
that offers key foundations of narrative economics. Part III then presents a list of
nine important perennial narrative constellations, one (or a pair) per chapter.

Part II
The Foundations of Narrative Economics