Explore the concept of uncertainty in economics as discussed by Keynes and the creator of 'narrative economics', R. Shiller, and understand how it impacts financial markets and decision-making.
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[...] their instinct, their intuition . and not on rational calculation as in the 'classical' approach. In addition, expectations are 'social', which induces significant effects. This is what he tries to show through the famous metaphor of the 'beauty contest'. 'Or again, to vary the metaphor slightly, the technique of investment can be compared to those competitions organized by newspapers where participants have to choose the six prettiest faces out of a hundred photographs, the prize being awarded to the one whose preferences most closely match the average selection made by all the competitors. [...]
[...] Shiller appears as the creator of 'narrative economics' which aims to study the 'narratives', the 'stories' . on which agents rely to make decisions: 'By narrating the economy, I mean the study of the propagation and dynamics of popular narratives, stories, in particular those related to interest and emotion, and how these narratives change over time and how they try to explain economic phenomena.' R. Shiller, Nobel Conference (my translation). "We must consider the possibility that sometimes the main reason for the severity of a recession is related to the prevalence and vitality of certain stories, and not to feedback or multiplication effects that economists like to model. [...]
[...] The economy is therefore largely permeable to 'speculative' phenomena. '(Speculators) are concerned, not with the true value of an investment for a man who acquires it in order to put it in his portfolio, but with the value that the market, under the influence of mass psychology, will attribute to it a month or a year from now.' J.M.Keynes. The behavior of agents is therefore largely dictated by 'conventions' that allow for coordinating expectations. The convention allows for stabilizing expectations and facing an uncertain future, especially in the long term, for example, the interest rate is a quantity that has a strong psychological character based on an anticipation of the future. [...]
[...] Keynes, The General Theory of Employment, Interest and Money, 1939 Keynes takes the example of financial markets and 'placements' (purchases of shares, bonds, currency . He compares the placement to the beauty contests organized by a London newspaper of the time, consisting of electing the most beautiful young women from among a hundred published photographs. The winner is the reader whose selection is closest to the five most chosen photographs by the entire readership. ?The winner is therefore the one who best approaches the global consensus, the aggregated opinion of others. [...]
[...] The economy is therefore based on expectations that can depend on 'vague' elements, abstract such as 'trust', optimism or pessimism . And this 'subjective' world linked to animal spirits has consequences on the 'real' world. 'Thus the conduct of each individual business when it fixes the volume of its daily production is determined by its short-term forecasts - forecasts relating to the cost of the various possible volumes of production and forecasts relating to the product of their sale; when production is intended to be added to capital equipment or even to be sold to distributors, the short-term forecasts of the entrepreneur depend in large part on the long-term (or medium-term) forecasts made by other people. [...]
