How Narratives Impact Financial Behavior

Abstract

Narratives are omnipresent in today's media to complement or even substitute ``hard facts''. Opinion leaders use narratives to persuade the audience of their interpretation of events, especially, when major exogenous shocks hit the economy. Despite the importance of narratives in public discourse, surprisingly little is known about their economic impact. In this paper, we provide experimental evidence that communication through narratives can have severe - potentially unintended - effects on fundamental determinants of financial behavior. In a controlled experiment subjects are exposed to news articles that either provide an optimistic, a pessimistic, or a balanced narrative about the COVID pandemic. We find that the more pessimistic a narrative is about the pandemic, the more pessimistic are subjects' expectations about the development of the stock market. Remarkably, we also find significant collateral effects of narratives on subjects' risk aversion and patience in incentivized experimental decisions. In a follow-up experiment, we investigate the mechanisms for the latter behavioral effects. Our results improve our understanding of how communication about exogenous shocks influences economic behavior by showing that narratives impact financial behavior through expectations, but - in case of strong personal involvement - may also have collateral behavioral effects on financial decision-making.

Keywords: Narrative Economics, Risk Aversion, Patience, Expectations

JEL Classification: D80, D91, E71, G41