How stories can spread and influence prices

Narratives are short stories that convey values and emotions. They can spread like an epidemic and have an influence on pricing in the capital markets. In this study, we show that the contagious power of the narrative surrounding bitcoin helped to drive the bitcoin price to its all-time high.

Behavioural economics teaches us that economic entities do not form their expectations in accordance with the rational expectations theory, i.e. by incorporating all available information and by fully understanding the economic context. Rather, they are guided by “gut feelings”. These include the selective and subjective perception of facts, heuristic analysis and herd mentality. The assumption of rational expectations leads to the assertion of the existence of efficient markets. But what is the implication of market participants using their gut feelings to make financial decisions? Robert Shiller proposed a remarkable answer: markets can be influenced by stories (narratives). In this paper, we use the example of bitcoin to examine whether market developments can be explained by behavioural economics and narrative economics.

Please note: this study is only available in German.

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