Narratives in History

Financial History Is Narrative History

Look back at financial history and you will find a repeating pattern. Each episode feels brand new, but structurally, the stories are remarkably similar. When a narrative achieves sufficient contagiousness, it transcends opinion and becomes a force that shapes reality. Shiller’s key insight about these episodes is this: at the moment a narrative dominates, questioning it feels foolish.

Let us trace the dominant narratives through the ages.

The 1920s: The “New Era” Narrative

In 1920s America, the “New Era” narrative reigned supreme. Post-World War I technological innovations — radio, automobiles, the electrification of daily life — had placed the economy on a permanently new trajectory of growth. The eminent economist Irving Fisher declared in October 1929 that stock prices appeared to have reached a “permanently high plateau.” Days later, the worst stock market crash in history began.

The core of the “New Era” narrative was the conviction that “this time is different” — that the old rules of economic cycles no longer applied. It took the Great Depression to shatter that belief, at an enormous human cost.

The Late 1990s: “The Internet Changes Everything”

The dotcom bubble’s dominant narrative was “the internet changes everything.” This was not wrong. The internet did change everything. The problem was that this narrative was used to justify infinite valuations for any company with a website.

Pets.com, an online pet supply retailer, raised $82.5 million in its IPO in 2000 and went bankrupt 268 days later. Under the dominant narrative of the time, “eyeballs” mattered more than revenue. Companies whose costs dwarfed their sales were valued at billions. Why? Because “the internet changes everything,” so traditional valuation methods were supposedly obsolete.

A mutation of this narrative even emerged: “profits are old-fashioned.” It sounds insane in retrospect, but at the time it was the central premise of investment theses at serious firms.

2005-2008: “Housing Prices Never Go Down”

The narrative preceding the Global Financial Crisis was that “housing prices have never declined nationally at the same time.” This statistical fact (it was technically true up to that point) was somehow transmuted into the belief that housing prices would never decline in the future.

This narrative combined with financial engineering to create a monster. Bundling subprime mortgages into securities was supposed to diversify risk and make them “safe.” Rating agencies awarded AAA ratings to bundles of junk loans. Why? Because in a world where housing prices never fall, the math checked out.

This is a textbook case of narrative overpowering reality. The data was screaming danger, but the story was louder.

2021-2022: “Inflation Is Out of Control”

After massive post-COVID fiscal stimulus combined with supply chain disruptions, prices surged. The Fed initially responded with its own narrative — “transitory” — but this counter-narrative quickly lost credibility.

The replacement narrative arrived: “Inflation is out of control and the 1970s are repeating.” This story supercharged commodity markets, maximized fear of rate hikes, and accelerated the historic 2022 bond market crash. The interesting detail is that even after actual inflation peaked and began declining, the “inflation panic” narrative continued to dominate markets for a considerable period. The data had already changed, but stories have momentum.

2023-2024: “AI Will Replace Everything”

Following ChatGPT’s emergence in late 2022, the narrative “AI changes everything” dominated markets. The NASDAQ rose over 40% in 2023, with the so-called “Magnificent 7” — Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta, and Tesla — driving the majority of gains.

The parallels with the 1990s dotcom bubble are striking. The core narrative — “this technology will change the world” — is true. AI is genuinely transforming the world. But there is a vast gap between “this technology will change the world” and “investing in this technology guarantees profits.” The internet changed the world, but Pets.com investors lost everything.

Whether the 2020s AI investment cycle will end like the dotcom bubble is something nobody knows. RETIC certainly does not. What we know is that the narrative structure is similar.

The Pattern: Narratives Make Risk Feel Rational

Across all of these episodes, a common pattern emerges:

1. The core narrative is partially true: The internet really did change the world. Housing prices really had risen for decades. AI really is revolutionary.
2. A partial truth gets extrapolated into universal certainty: “This technology is important” becomes “investing in this technology is a guaranteed win.”
3. Risk becomes invisible: When the narrative is strong enough, warning signs are dismissed as outdated thinking.
4. Questioning feels foolish: “You just don’t understand the internet/AI/the new economy, do you?”

This is the insight Shiller emphasized repeatedly. During a bubble, the narrative feels so obviously correct that betting against it appears irrational. Right now, somewhere in the world, someone is absolutely certain that “this time is different.” And honestly, sometimes it really is different.

Distinguishing the “sometimes” from the “usually” is the entire game, and RETIC will not claim to have a winning record at it. But we know the patterns, and knowing the patterns is demonstrably better than not knowing them.

The Uncomfortable Takeaway

The most uncomfortable lesson from narrative history is not that people were foolish in the past. It is that we are no smarter now. The narratives change — from railroads to radio to the internet to AI — but the human susceptibility to compelling stories remains constant.

Every generation believes it has learned from the previous generation’s mistakes. Every generation finds a new narrative that makes excessive risk feel perfectly rational. And every generation discovers, eventually and painfully, that the narrative was not the same thing as reality.

RETIC exists to track that gap between narrative and reality in real time. We will not always get it right — our track record makes that abundantly clear — but at least we are watching. And we invite you to watch with us, with the appropriate dose of humility about what any of us can actually predict.