Proposition 5: Truth Is Not Enough to Stop False Narratives
Suddenly prominent economic narratives sometimes appear mysteriously and for
no apparent reason. One such narrative occurred after the 2007–9 world financial
crisis, when near-zero interest rates were interpreted as a harbinger of a “lost
decade,” as they had been for Japan in the 1990s. The Japanese “lost decades”
story is just one example, just one observation and hence of no statistical
significance, but it was contagious enough around the world to rekindle Great
Depression narratives, and it launched serious fears about “secular stagnation.”
Indeed, such narratives and fears can have serious effects on the economy and
our lives. For example, according to political scientist Stephen Van Evera
(1984), World War I started at least partly because a false narrative, which he
calls “the Cult of the Offensive,” went viral. This narrative was a theory that the
country that moves first to attack another country will generally have the
advantage. The idea was supported by some historical narratives and illustrated
by simplistic psychological, mathematical, and bandwagon arguments.
Ultimately, Van Evera argues, this theory led to instability: everyone wanted to
attack first. Germany thought it had a “window of opportunity” to successfully
pursue a “preventive war” against Russia. But the narrative was wrong. It had
economic consequences—a huge arms race—and resulted in a war that was
disastrous for both the offense and the defense. Norman Angell called the
narrative “The Great Illusion” in a 1911 book with that title. Angell’s ideas were
convincing to many (and he later won the Nobel Peace Prize for his work), but
they did not go viral fast enough to prevent the war. The illusion won out even
after it had been decisively disproven, because the proof did not spread as fast as
the illusion did.
By analogy, we see that economic activities are not always based on up-to-
date information. Sometimes they are based on whatever narratives are going
viral at a particular time. While general knowledge steadily advances in many
respects, we do not necessarily see a steady progression in the knowledge that
often importantly affects economic behavior. The narratives that surround and
define Bitcoin provide an example. There are brilliant computer scientists who
are fascinated by cryptocurrencies but who won’t say whether the captivating
ideas that generate public excitement are ultimately right or wrong.
Fortunately, in matters of simple fact, unencumbered by any human interest

or story quality, modern society stays generally on target, or at least willing to
stand corrected if in error. For example, most people can name the various
highways around their home correctly and will accept correction if an error is
pointed out to them. They also routinely trust medical doctors to tell them the
truth about things they know nothing about. Well, sort of, anyway. In a 2003
study, the World Health Organization concluded, “Poor adherence to treatment
of chronic diseases is a worldwide problem of striking magnitude.”7 The WHO
went on to report that only about 50% of patients in developed countries
consistently follow doctor’s orders for chronic illnesses, and even fewer do so in
emerging countries. Adherence is probably even worse when it comes to
following advice from more controversial economic pundits or financial
planners. But where does advice end and speculation begin? And how do we
distinguish informed speculation from confabulation or fiction? The slope is
slippery. Ultimately, a story’s contagion rate is unaffected by its underlying truth.
A contagious story is one that quickly grabs the attention of and makes an
impression on another person, whether that story is true or not.
A study by Soroush Vosoughi and his coauthors published in Science in 2018
used social media data to compare the contagion rates of true stories with the
contagion rates of false stories.8 The researchers chose the stories from among
those that had been vetted by six fact-checking websites: snopes. com, politifact. 
com, 
factcheck.org, 
truthorfiction. com, 
hoax-slayer. com, 
and
urbanlegends.about. com. They found 95–98% agreement across these sites as to
a story’s truth or falsity. They also looked at 126,000 rumors spread by three
million people, and they found that false stories had six times the retweeting rate
on Twitter as true stories. The researchers did not interpret that finding as
specific to Twitter, and the result may be specific to the time of the study, a time
when mistrust of conventional media sources was higher than usual. Rather,
these authors interpreted their results as confirming that people are “more likely
to share novel information.” In other words, contagion reflects the urge to
titillate and surprise others. We can add another twist to that conclusion: a new
story correcting a false story may not be as contagious as the false story, which
means that the false narrative may have a major impact on economic activity
long after it is corrected.