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Narrative Economics and the Power of Stories

If I start a salacious tweetstorm that our local bank is running out of money, that rumor will circulate quickly. Eventually, the rumor will trigger a bank run. By tomorrow, the bank will face insolvency, even though it was business as usual at the bank this morning.

This is the idea behind Narrative Economics. Robert Shiller wrote Narrative Economics, in which he explores how stories impact the economy. In particular, narratives stoked three depressions and recessions in the US in 1920, 1929, and 2008. Shiller, a respected and lauded professor at Yale, models the spread of narratives in these periods using epidemiology.

Positive narratives are just as mighty. Shiller also studies the Rubik’s cube and internet memes as examples of narratives that take on a life their own and influence the behavior of millions.

If there’s reason to believe stories are powerful economic forces at the country level, there’s reason to believe stories are just as compelling for individual companies. We do see this behavior in Startupland.

Some seed-stage companies pack their seed rounds with luminary angels in a field. One company recently courted many top VPs of Product in the valley. This cadre of product influencers reinforces the narrative that the “smartest product managers” use this product.

Customer testimonials employ social proof to reinforce a vendor’s narrative. The better respected the customer testimonial, the more forceful the testimony.

If you’ve ever worked for a major corporation and received press training, you know the importance of a narrative. You’ll have been trained to answer questions in a very particular way: each answer will tie back to the main storyline of the business.

What is the narrative of your business? Here are some from our portfolio. Kustomer is the modern customer support platform built by veterans in the field. The founders have built three companies in the domain, sold their last one to Salesforce, and developed Kustomer with all the knowledge and insights from those experiences.

Gremlin is the chaos engineering company. The founders developed chaos engineering and resiliency testing at Netflix and Amazon, which increased those services’ uptime from three nines to four nines.

The customer story typically originates from two founts; either the founders or product marketing. Regardless, the message should be promulgated through every channel: sales, marketing, press, recruiting, events, etc.

The more you can spread the narrative, the greater the potential force for your business. To what extent is impossible to know. As Shiller writes in his concluding paragraphs, “there are serious issues of inferring causality…these issues are not surmountable.” Even if we can’t measure it, or directly attribute causality, the effect of stories and narrative economics is real and powerful.