When there is high uncertainty, there is more attention to the dynamic of the stock market which makes perfect sense. This is especially the case when there is a market downturn. That is, when faced with periods of significant change and uncertainty, investors will look to stories or narrative to help understand the cause of these big market moves. History plays a role when there are large market declines because investors will look for key past events to develop stories to explain the current market dynamics. When we have had stock market declines like 2008, there will be more attention given to past rare market disasters. Investors will reach back over their collective memory to offer some explanation for market downturns. These memories and stories are embedded in newspaper stories.
This work is explored in the paper, Crash Narratives by Goetzmann, Kim, and Shiller. Shiller has been developing thinking on narrative economics for over a decade. I think this is a fruitful are of research. There is an intersection between sentiment, market behavior and the stories that surround the market; nevertheless, it is unclear how narrative and market behavior are linked. Narratives inform or clarify beliefs which then impact choices. The stories that attempt to explain what is happening when faced with uncertainty helps direct decisions. Clearly there is a correlation between narrative and market moves, yet what is the impact of stories as a cause of market moves is murky. Clarifying the link between narrative, action, and market behavior is one the goals of this paper and narrative economics in general.
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