2020

Impact of Behavioral and Narrative

economics on the stock market
ACADEMIC GROUP 7, SY-A

Karnica Taneja (A019)

Mohit Kacholia (A024)
Raghav Agarwal (A031)
Sanjana Panda (A039)
Sindhuja Khaitan (A042)
Stuti Gupta (A046)
Udit Raj Singh (A050)
Author Topic/ Title Methodology Data Results/ Findings Implications/ Link
& Year Relevance of your of
study Stud
y

Traci When They employ meta- Published The findings The research paper Whe
H. poignant analysis to articles were suggest that, for gives us a very n
Freling stories systematically collected from important decisions relevant finding of poig
a outweigh examine the role of on JSTOR, that do not induce the importance of nant
Zhiyong cold hard different situational EBSCO host, strong emotional narratives in stori
Yangb, facts: A meta- factors by Emerald, and engagement, persuading people es
Ritesh analysis of expanding the Google individuals rely in their decision outw
Sainia, the anecdotal purview of extant Scholar, and more on statistical making. eigh
Omar S. bias reviews and for (vs. anecdotal) Implicating the cold
Itanic, conducting a unpublished information in their result can be used hard
Ryan multivariate papers and decisions. These in analysing the facts
Rashad moderator analysis dissertations findings elucidate reasoning behind :A
Abualsa to more closely on SSRN why statistical investors decisions, meta
mhd. examine boundary Elsevier and evidence is more which are usually -
(2020) conditions to the ProQuest persuasive with with low emotional anal
impact of evidence Digital policy makers on engagement. This ysis
type of persuasion. Dissertations. the issue related to can help us decide of
They carefully To enhance seat belt compliance which if statistical the
examined each the for children, findings about anec
article in the exhaustiveness whereas anecdotal companies of dotal
database, recording of the search, evidence is more investors are more bias
all moderators they also likely to persuade persuasive than
explored. The posted a call parents. Since in anecdotal findings/
coding and analysis for situations where or personal
of moderators was unpublished emotional experiences.
guided by two studies on engagement is high
criteria. First, they academic (e.g., an issue
attempted to forums such as associated with a
identify conceptual ELMAR. The severe threat,
moderators that search involving a health
previous research spanned 42 issue, or affecting
associates with years (1977– oneself), statistical
emotional 2019) and evidence is less
engagement used. ultimately, 61 influential than
Second, they papers anecdotal evidence.
sought variables (including 50
examined in a published
sufficient number articles and 11
of studies (N > 5), unpublished
so that proper manuscripts)
moderation tests were included
could be conducted. in the meta-
analytic
 database. On
average, each
paper contains
2.62 studies,
yielding a total
of 160 effect
sizes.

Author Topic/ Title Methodology Data Results/ Findings Implications/ Link

& Year Relevance of your of
study Stud
y

Bing How Do The selected N = 145 The research paper Although the paper How
Han & Statistical and students were given students were concluded that concludes that Do
Edward Narrative consent forms and chosen from statistical messages statistic evidence is Stati
L. Fink Evidence questionnaires to undergraduate have a more more persuasive stical
(2012) Affect fill and were class in a U.S. perceived than narrative, it and
Persuasion?: collected State persuasiveness over gives an interesting Narr
The Role of separately. For the University, for narrative messages. insight as to how ative
Evidentiary stimulus, 12 the pilot test. It was also observed people perceive Evid
Features messages with a N = 130 that narratives are narrative. It can be ence
similar structure students were more persuasive further used in our Affe
and length, and chosen from when they are in- study after ct
relatively equal the same U.S. depth descriptions overcoming a few Pers
emotionality ( State of one incident, as research gaps. uasio
using the Lynch University, for compared to a n?:
formula) were the main test. compilation of brief The
introduced. Each descriptions of Role
participant was many stories. of
assigned two Evid
messages. They entia
checked for and ry
rated the amount of Feat
statistical evidence ures
and narrative
evidence.
Author Topic/ Title Methodology Data Results/ Findings Implications/ Link
& Year Relevance of your of
study Stud
y

Robert Narrative This address Here the Narrative This paper directly Narr
J. Economics considers the author uses economics, to the talks about what is ative
Shiller epidemiology of Google Ngram extent that it has narrative Econ
(2017) narratives relevant to compute ever been practiced economics and omic
to economic various by scholars, has had provides us various s
fluctuations. The phrases and a poor reputation. examples or
human brain has their The impact of instances when we
always been highly popularity by narratives on the are able to see
tuned towards looking at the economy is clearly how
narratives, whether frequency of regularly mentioned narrative
factual or not, to their use, to in journalistic economics plays a
justify ongoing show how circles, but without major role in
actions, even such much power the demands of forming the views
basic actions as does stories academic rigor. of the people about
spending and have. Also, the research any situation and
investing. It is this in this area is still sometimes even
part that the very limited. makes them
research paper determinant enough
targets and to act on it. This
provides example paper also shows
in history where how narrative
narrative played a economics though
very crucial role in being such an
determining the important factor or
future of many indicator which if
events and even properly used with
caused some. other qualitative
and quantitative
indicators can help
in getting a very
clear prediction of
future economic
events, is still being
ignored.
Author Topic/ Title Methodology Data Results/ Findings Implications/ Link
& Year Relevance of your of
study Stud
y

Dougla Markets are a Narratives are The network is The research paper The research gives Mar
s R. function of under-theorised and composed of concludes, that us a very strong kets
Holmes language: until recently approximately narrative economics base to put forward are a
(2019) Notes on a under-recognised as 9,000 contacts plays a very our point that funct
narrative core variables in the business important role in Narrative ion
economics influencing the and financial forming the views economics is a very of
speed and direction communities, of the Central uncharted territory lang
of changes in as well as in bankers and policy and in today’s uage
expectations and, governmental makers. Also, what world where the :
therefore, as core and non- the research papers views of the public Note
macroeconomic governmental shows is that though matters a lot, it is a s on
variables that shape organisations, this is quite topic worth paying a
the policy and the agents unbelievable and attention to. narra
processes of central interview 600 sometimes even tive
banks. The author of their own goes against the econ
examines below contacts. The classical economics omic
how the thousands contact pool is sometimes, the s
of micro-level selected ‘with insights or
narratives garnered a cross-section predictions gained
on a regular basis of companies from the contacts is
by the Bank of in terms of too accurate to be
England’s staff of sector, ignored.
regional agents can location and
affect the decision size, in order
making of the to get a
MPC. The author reasonably
also discusses that balanced
how “language” or view’ of the
“talk”, plays an UK economy
integral part in the as a whole
financial markets
and in-between
policymakers. And
how the insights
gained from the
“contacts” of the
agents of MPC are
actually quite
accurate.
Author Topic/ Title Methodology Data Results/ Findings Implications/ Link
& Year Relevance of your of
study Stud
y

Zihao Beyond This essay attempts The essay uses The results show The research shows Beyo
Su Numbers: to argue that Google that narrative how the idea of nd
(2018) Narrative narrative Ngram, as it’s economics is narrative Num
Economics as economics – a data source, theoretically and economics is bers:
a Framework nascent branch of for various empirically becoming so much Narr
to Understand behavioral topics to study reasonable and important and how ative
Financial economics that such as market seems be a better at many times it Econ
Crises emphasizes the efficiency, approach to detect comes out as a omic
effects of story- various macroeconomic better option for s as
telling and rhetoric economic hazards and prevent predicting various a
- is a viable cycles and, to financial crises than financial crisis as Fram
framework to show how we the traditional, compared to other ewor
understand can understand “mechanical” “Mechanical k to
financial crises. It some recent forecasting models. models”. It also Und
gives some bold financial crises The author also says shows us that how ersta
thoughts on how by examining that once the the narratives nd
narrative the narrative economists are which are related to Fina
economics can help aspect of equipped with any big event, still ncial
us rethink existing markets. better tools to study remain with the Crise
economics There is verbal data, the people and though s
frameworks, such mention of a future of narrative mitigate, they never
as behavioral test that was economics should cease to exist.
economics and conducted at be promising.
institutional the university
economics. The of Chicago, by
essay has also used Professor John
“The Arthur A. list, the
Model of sample space
Narrative of which was:
Economics” after N = 170,
some modification
in the model we see
that it rejects the
assumption that
every market
participant is
homogenous and
therefore must
rationally form the
same expectational
models. Using
plain language, the
main assumption
 here is “people tell
stories
differently,” even
when they are
describing the same
events.

Author Topic/ Title Methodology Data Results/ Findings Implications/ Link

& Year Relevance of your of
study Stud
y

Vyaches Narrative and This paper enables This paper The results show The research paper Narr
lav V. Institutional us to understand obtains that narratives play directly puts forth ative
Volchik Economics better how necessary a significant role in the point that and
(2017) institutions qualitative specific markets in studying narratives Instit
influence data on the institutional design, and institutions is ution
economic (social) content of as well as long-term crucial al
action. It also talks rules, norms of motives. It also for modern Econ
about many institutions affects economic theory as omic
interpretations of that cannot be macroeconomic it helps to improve s
the narratives and obtained by processes, such as qualitative and
uses many analysing financial bubbles, quantitative
historical examples exclusively stock market methods of
from the Soviet statistical and failures, reflect analysing empirical
past, Akerlof and other irrational optimism evidence and
Snower to explain quantitative in different areas of enables researchers
why it is narratives historical the economy. The to understand
that allow us to facts. It also stories by narratives complex economic
better understand uses narrative can successfully processes.
and learn social analysis, determines specific
norms and which is one constraints and
institutions. So of the useful motivations among
basically, it uses methods of entrepreneurs.
narratives to focus research,
on a particular type which
of modelling of provides a
economic and other better and
social processes more realistic
and the use of picture
inductive thinking explaining
to identify and economic
describe many actions,
behavioural elections, and
patterns and other repeated
institutions. interactions of
actors.
Author Topic/ Title Methodology Data Results/ Findings Implications/ Link
& Year Relevance of your of
study Stud
y

Frank Two The approach to the The only data The major By outlining the Two
Pasqual Narratives of study was fairly used in the conclusion of the impact of narratives Narr
e Platform observational, and study was author’s study was in constructing ative
(2016) Capitalism some analysis of observational that while narratives economic policy, s of
secondary data. The data, collected play an important the paper allowed Platf
author talks about from years of role in connecting us to look at the orm
the narrative nature papers and to the past to the newly developing Capi
of economics, by opinions future, oftentimes field of narrative talis
giving examples of justifying empirical research economics in a m
several well-known capitalism. can be adduced to broader light. It
narratives used to support particular also reminded us
justify economic narratives. that how easily
policy decisions. Specifically, he narratives can be
He also used an believes that the manipulated to fit a
example of the empirical research particular economic
“tragedy of the into capitalism was agenda, and for
commons” theory, premised on the each narrative,
and cited empirical same ideas it was there exists a
research that used to validate. By counter narrative.
revealed it to not creating his own
hold true in real counter narratives,
life. He then creates he also explained
arguments in that a plausible
favour of a counter counter narrative is
narrative, one that far more likely to
is against platform displace a
capitalism to prove conventional
that both narratives narrative than
can be used and isolated empirical
manipulated to challenges to the
influence decision conventional
making. narrative.
Author Topic/ Title Methodology Data Results/ Findings Implications/ Link
& Year Relevance of your of
study Stud
y

Graham Storytelling The methodology During the The paper The paper shows Stor
Smart in a Central used was authors years concluded that the role narratives ytelli
(1999) Bank- The interpretive as a writer and despite economists’ can play in ng in
Role of ethnography to consultant at empirical professional a
Narratives in depict one specific the Bank of methodologies, its discourse. The Cent
the Creation narrative- the Canada, he knowledge making author also showed ral
and Use of “monetary policy collected and actually depends on that specialised Bank
Specialized story” to see how it analysed a narratives and the input from a
Economic is used as a shared wide variety of monetary policy multitude of people
Knowledge resource to make qualitative story coordinates is progressively
decisions about data, including efforts, and serves integrated into a
monetary policy field notes as a medium single narrative,
and to justify those from on-site between economists that serves the
decisions to the observations, and the public. institution. This
public. reading showed us how
protocols, easily narratives
tape-recorded can be used to
meetings, serve specific
recordings of interests.
presentations
by senior
economists at
writing
seminars,
internal and
published
documents,
and scores of
interviews.
He used
previously
collected data
and gathered
additional data
on the
epistemic
activity of the
banks
economists,
including 30
interviews.
All the data
was from 1994
 to 1996.

Author Topic/ Title Methodology Data Results/ Findings Implications/ Link

& Year Relevance of your of
study Stud
y

Richard Narrative The authors have The reports The research paper Although this paper Narr
J. Economics constructed key analysed have concludes that there specifically ative
Taffler, and Investor word emotion been is a strong negative researches the Econ
Vineet Emotions: An dictionaries and downloaded association between effect of Narrative omic
Agarwa Empirical categorized into from the returns and Economics in the s and
l, Analysis seven groups - Factiva volatility while Chinese market, it Inve
Chenya Mania, Excitement, database, trading volume is shows the empirical stor
ng Happy, Worry, which gives positively evidence of Emo
Wang Anxiety, Panic, and access to all associated with presence of tions
(2019) Revulsion. They media reports. contemporaneous correlation between : An
used Wordscount, a returns. market emotions Emp
Chinese software to It also proves that and market returns; irical
count the frequency there is a weak and is an important Anal
of how many times association between contribution in the ysis
a word from their emotions, and the field of Narrative
seven key word way the market will Economics. It is
emotion progress in the extremely relevant
dictionaries future. to our study.
occurred and were
then standardised. 1
Correlation and
OLS regressions
have been used to
check for
association between
market emotions
and market returns,
volatility, and
trading volumes.

1 Total frequency of emotion words in the respective category in the month / Total amount of words in all the news and
articles downloaded in that month
Author Topic/ Title Methodology Data Results/ Findings Implications/ Link
& Year Relevance of your of
study Stud
y

Baback Trading The paper focuses The daily They concluded that The results are Trad
Roodba European on how the advent exchange rate there is a significant useful to our study ing
r, Hugh Central Bank of social networks data was increase in the as they tell us the Euro
Metcalf, Rumours on has enabled sourced from volatility of the availability of pean
Fabrizi the EUR- rumours about the Bloomberg EUR-USD Twitter as a Cent
o USD markets, which are professionals. exchange rate medium of ral
Casalin exchange rate largely unexplored. They omitted during which the spreading rumours, Bank
(2018) market Over the period of holidays, and rumours arrived and or narratives, Rum
September 2013 to had a final circulated on provides us with a ours
May 2015, they sample of Twitter. With a actionable
sourced data for 596160 reasonable level of information that
these rumours as a observations. accuracy, they were can be associated
possible Further, they able to predict that a with the significant
explanation for the collected lot of major trends fluctuations in
unexplained relevant public in volatility could market prices.
volatility in the information be attributed to
financial markets. via independent twitter
Bloomberg, users.
and tracked
“rumours”
posted on
twitter by
relevant
professionals
for the same
period.

Author Topic/ Title Methodology Data Results/ Findings Implications/ Link

& Year Relevance of your of
study Stud
y

Halil The stock The purpose of this The study uses The empirical Assuming rumours The
Kiymaz market study is to the stock findings suggest to be our narratives, stock
(2010) rumours and investigate the market that there are this study mark
stock prices: effects of stock rumours/gossi statistically concludes that they et
a test market rumours/ ps published significant do have an affect rumo
of price gossips on the in the `Heard abnormal returns on actual stock urs
pressure and prices of stocks on the Street’ around the market prices and and
size effect in traded at the (HOTS) publication date. decisions taken by stock
an emerging Istanbul Stock column of While positive, traders price
market Exchange with Ekonomik significant s: a
respect test
 to price pressure Trend weekly abnormal returns of
and size effects, magazine are observed in days price
assuming the during the prior to the press
rumours/gossips to period of 21 publication ure
be narratives. The July 1996 date, negative and
study analyses the and 17 August insignificant size
effects of the 1997. The abnormal returns effec
rumours on stocks HOTS page is are t in
In 3 parts, The first published detected in post- an
examines the effect every publication period. emer
of rumours around week in ET. The results further ging
the publication Topics show that the price mark
date. The second covered in the movements are not et
looks for unusual page include due to the price
activity prior to information pressure created by
publication of about both a the publication of
rumours and single firm and rumours. Contrary,
gossips. Finally, it a group of the abnormal
analyses price firms. The returns are more
movement after the purpose of pronounced when
publication date. page is to the postestimation
inform data is used.
investors
about market
developments
influencing
stock prices.
Information
provided by
HOTS, with
rare
exceptions, is
favourable.

Author Topic/ Title Methodology Data Results/ Findings Implications/ Link

& Year Relevance of your of
study Stud
y

Adrian Behavioural The authors aim to The author has Understanding the This study proves Beha
Mitroi finance: new put forward their citied many psychological how psychological viour
and research point by citing papers and foundation of biases can affect al
Alexand trends, examples from taken human behaviour in investor decisions finan
ru socionomics various accredited examples from financial markets and cause changes ce:
Oproiu and investor papers. It argues them, they use facilitates the in the market new
(2014) emotions how behavioural graphs, formulation of prices. Behavioural resea
finance is an indices, and investment policy finance rch
important aspect economic statements for complements but trend
and how it affects formulas. The individual investors. not replaces s,
 different forms of paper aims at The paper advances technical and socio
financial decisions demonstrating the idea that the fundamental nomi
taken by investors. whether investor analysis by the cs
investor psychological systematic analysis and
psychological biases lead to of the fundamentals inves
biases lead to investment of the market prices tor
investment performance to tilt as a result of the emot
performance to the mean in the correlation between ions
to tilt to the long run and by investor experience
mean in the following the trend, and expectations
long run. the financial market and the market
population do not momentum
enjoy significant
sustainable benefits.
As a reflection of
the behavioural
biases and
influences, the
statistical
demonstration
supports the
conclusion that
markets do not
random walk.

Author Topic/ Title Methodology Data Results/ Findings Implications/ Link

& Year Relevance of your of
study Stud
y

Khavi A Study on Descriptive This research This paper seeks to This paper tries to A
Priya Behavioural research is paper exhibits find that talk about that Stud
Bagya Finance to employed to get the with key Behavioural finance Behavioural y on
Lakshm Understand research results. analysis tools is an integral part of finance could be a Beha
i (2020) the This paper has used like factor the decision-making comparatively new viour
Psychological random sampling analysis, method as a result paradigm of al
Behaviour of technique. A binomial of it heavily finance, that seeks Fina
Individuals in sample of three distribution, influences the to supplement the nce
Financial and hundred chi-square investors’ quality theories of
Non-financial respondents are analysis, performance. It finance by
Investment taken for the study. correlation concludes that a introducing
and Decision It has used analysis and small degree of behavioural aspects
Making questionnaire for regression change in the to the decision-
collection of data. analysis with probability will making process.
The data so three hundred have a high impact This paper
collected is as the sample on investment concludes that
analysed using the size and the decision making as behavioural finance
statistical research was the investors’ risk and investment
techniques like conducted preference is highly management does
percentage within the risk-averse. The everything from
analysis, factor Chennai city reflexive and serving one to
analysis, binomial in India. This reflective manage
distribution, paper is an approaches to behavioural
correlation, Kendall attempt to decision making irrationalities to
W test, regression comprehend will influence protecting one
and chi-square. and behavioural biases. against some
distinguish the The investor’s return-damning
importance of behaviour is flows of efficient
psychological predominantly market theory.
behaviour of based on the risk
individuals and return-trade off
towards which impacts the
investment psychology of the
and decision investor decision
making. This making.
paper also uses
behavioural
biases like
overconfidenc
e bias, herding
bias, regret
aversion bias
and mental
accounting
bias. It also
used Big Five
factor theory,
reviewed the
accessible
personality
tests of the day
and set that
almost all of
the tests that
control any
promise
perceived to
live a set of 5
common
factors.
Author Topic/ Title Methodology Data Results/ Findings Implications/ Link
& Year Relevance of your of
study Stud
y

Michael Consumer Three studies—a First study’s Although The study evaluates C
A. Responses to field survey and data were significantly more the effects of o
Kamins, Rumors: two experiments obtained from negative rumors are rumors which ns
Valerie Good News, are used to examine 355 reported as received shows that people u
S. Bad News social and individuals of and transmitted, believe in m
Folkes, situational factors Arkansas they are not spread narratives spread as er
and influencing the Household to a greater degree WOM. The R
Lars evaluation and Research than positive conclusion of this es
Perner communication of Panel. For, rumors. The results study will help us p
(1997) information Second study shows that once analyse the o
labelled as rumor 146 MBA word of mouth consumers ns
and then students at a (WOM) information investing es
statistically private West is labelled as rumor, behaviours in to
analysed. Coast respondents relation to all the R
university significantly rumors about u
participated discount its stocks and m
while for third importance and companies. or
study 122 credibility as a s
MBA students source of product
participated. information.

Author Topic/ Title Methodology Data Results/ Findings Implications/ Link

& Year Relevance of your of
study Stud
y

Amlan Role of The paper is mainly Secondary As the objective for This paper Role
Jyoti Behavioural based conceptual data taken the paper suggests basically tells us of
Sharma Finance in the and is descriptive from the limitations of that we must Beha
(2016) Financial in nature and it is information the traditional recognise the viour
Market based on the provided by finance theories and shortcomings al
different research different significance conventional Fina
papers, journals, journals and behavioural finance. finance and growth nce
and articles related articles and The following were of behavioural in
to behavioural research the limitations: finance in this the
finance available papers related - Concept of regard is definitely Fina
over internet. to behavioural Rationality a positive aspect to ncial
Various other finance. - Role of better study the Mar
related books and emotions in investor behaviour ket
journals which are investment in context of stock
available in - Information market, although it
physical form are al accuracy needs more
also accessed to - Role of refinement and
 develop the Experience more rigorous
foundation of the - Demographi analysis to replace
paper. c factors a far impacted
theory like EMH.

Author Topic/ Title Methodology Data Results/ Findings Implications/ Link

& Year Relevance of your of
study Stud
y

Zihao Behavioural The study focused Researcher has According to the This papers tells us Beha
Su Finance:Appl on two main parts – considered the results, the so-called about the behaviour viour
(2018) ication to Spanish mutual effect of asymmetric of fund investor al
Investors and fund investor and different performance-flow and mangers Fina
Managers in managers sample relationship is behaviour. It also nce:
Spanish behaviour. periods, thus found in the first tells us how their Appl
Mutual Funds Investors attitude is the 1994-2004 subperiod of the nature changes icati
based in two is a period of sample analysed for when they are on to
databases that are dramatic money market suffering losses and Inve
domestic equity growth of funds. However, it when they have stors
funds and money mutual fund is not possible to gains. Investors try and
market funds. industry in generalise it for not to gamble on Man
To analyze the risk Spain. Author domestic equity their gains and try agers
taking behaviour of also stated funds. We confirm to coverup losses. in
mutual fund several that investment Losers try to Span
managers in theories of and flows to good increase their risk ish
response to their the pioneering performers are more than winners. Mut
relative work of higher than to bad ual
performance different performers but the Fund
In this case, people. attention is focused s
managers would be on both extremes,
affected by whilst no significant
phycological bias effect of return on
in prospect theory mid-performers is
of Kahneman and found. we conclude
Tversky(1979) that extreme return
suggest that losers change the
individual tend to risk exposure to
lock their gains and extreme positions,
gamble on losses. either great increase
Interim losers tend in a gamble to
to increase the risk 'catch up' their
of their portfolios peers, or great
more than interim decrease fearing
winners after a dismissals.
performance
assessment.
SYNTHESIZED REVIEW
Classical economic theories suggest that consumers and investors act as rational beings while
making decisions, however, since humans are dynamic beings, their decisions are not always
in line with classical predictions. In our study, we seek to examine what impact other
economic theories might have on investor decisions, in particular, the behavioural finance
and narrative economics theories.
Narrative economics is a relatively new study, conceived by Nobel Prize-winning
economist Robert Shiller, that looks at how stories can help drive financial events. We
believe that stories, or rumours about the stock market price changes, can explain the
investment decisions that classical economic theories cannot. While the usage of narratives is
extremely common in research in the fields of history, sociology, or even psychology; limited
research has been done into its role in economics. On the other hand, the behavioural finance
theory, which studies how investors make decisions in the real world, has been studied in
extensive detail, despite also being a new theory. It includes the role psychology, personal
biases and heuristics have to play in investor decisions, and by studying this in greater detail
we can understand why the average investor makes such poor decisions. Recent research
shows that the most investors makes decisions based on emotion, not logic; as they buy high
on speculation and sell low in panic mode.2
For this purpose, we reviewed 16 papers, in the fields of both narrative and behavioural
economics. These can be broadly grouped into the following themes-
1. Narratives vs Statistics - can narratives take precedence over statistical facts in
decision making?
2. Observation of Narratives and their role in various other areas of economic interests
3. Narratives in the stock market
4. Behavioural finance and investor decisions
In “When poignant stories outweigh cold hard facts: A meta-analysis of the anecdotal bias”
(Frelinga, Yengb, Sainia, Itanic, Abualsamhd, 2020) it was observed that situations
involving strong emotional engagements would lead to an individual relying on narratives for
their decision making. This is extremely relevant to our study, as it’s expected that investors
will not be extremely emotionally invested in their decisions, and hence should be expected
to rely on statistics to make informed decisions. Usually, until the investors are in some
personal financial crisis, they should be more likely to believe in broker reports with statistics
or other valuations which are entirely statistic based. They should be more likely to invest in
a company with good books and good statistical records in general. Other similar papers
reviewed seemed to yield similar conclusions, with the addition that narratives tend to be
more persuasive when they’re in-depth descriptions of one incident (Han, Fink, 2012).
However, these conclusions were reached after conducting experiments in controlled
experiments, and in the real world scenario, the role of narratives in decision making cannot
be ignored- the incident of the gain in popularity of the Laffer curve amongst the public
during the 1980s, or the popularity of Donald J Trump during the elections have been cited as
situations in which narratives played a crucial role, specifically in Trump’s case where a
television show led to the narrative of his business skills being formed (Shiller, 2017). Shiller
gave several historical examples of narratives influencing major economic events, including
recessions. Hence, this paper was imperative to our study by informing us of the huge, mostly

2
Chaudhary, Amar Kumar, and Puja Kumari. “A Study on Impact of Behavioral Finance in
Investment Decisions of Small Investors.” International Journal of Management Research and
Business Strategy, vol. 6, no. 3, July 2017
http://www.ijmrbs.org/ijmrbsadmin/upload/IJMRBS_5cd8f979eb230.pdf#:~:text=Recent%20research
%20shows%20that%20the,the%20joy%20of%20earning%20money
ignored role of narratives in the field of economics. Further, it is theorised that narratives can
predict or sometimes even cause major financial events in the world, like the Great
Depression, or the Housing bubble, by proving that markets are full of stories and players
take decisions based on the faith they have in these stories (Su, 2018). This helps us
understand the constant oscillating between bullish and bearish sentiments by market players.
We also examined papers looking at how narratives play a role in the monetary policy of a
country. It was concluded that the decisions of the monetary policy committee in London are
greatly affected and influenced by the stories told by the “contacts” from different sectors of
the economy, to their agents who pass on this information to the committee (Holmes, 2019);
while in Canada, it was seen that not only do narratives assist in the monetary policy’s
decision making, they also serve to create a medium in transferring this information to the
public (Smart, 1999). Clearly, narratives are extensively used in policymaking for the
economy, hence adding to the relevance and need for our research to explore it further. The
various narratives of capitalism were also looked at, to show how various narratives from
decades ago are still being used to justify policy decisions (Pasquale, 2016). Pasquale added
to our knowledge for this research with his conclusions on how narratives can not only be
validated with empirical research, they can also be easily manipulated and displaced by
counter-narratives. After having reviewed papers on the study of narratives in general, and in
the field of economics, we looked at 4 papers that looked directly at the effect of narratives,
or rumours, on financial markets. Research indicated that rumours surfacing on social media
sites, like Twitter, could be responsible for the unexplained volatility in the EUR-USD
exchange rate market (Roodbar, Metcalf, Casalin, 2018). The paper was unable to quantify
the extent of their impact, adding to our research gap. A study on the impact of stock market
rumours on the Istanbul Stock Exchange yielded similar results (Kiymaz, 2010). Positive
rumours are said to spread more than negative ones, which shows that investors are more
likely to believe in positive narratives when making decisions (Kalmins, Folkes, Perner,
1997). It explains how the sudden highs in certain stocks outbid the lows when information
about them goes viral through word of mouth. Although it is difficult to quantify the effect of
narratives, researchers have constructed seven key word emotion dictionaries based on how
investor emotions affect the stock market. These key word dictionaries were used to calculate
the frequencies of certain words over their time period and used correlation for association. In
an empirical analysis conducted on the Chinese Stock Market and the Chinese Stock Market
Bubble (2014-2016), the method of quantifying and calculating the effect of Narratives and
Investor Emotions on Market Returns, Volatility and Trading Volumes is effective. This was
an important contribution as there as countless papers on narratives vs statistical evidence,
but this paper shows how statistics can back up narratives (Taffler, Agarwal, Wang, 2019).
Finally, we reviewed papers on behavioural finance. Behavioural finance is a comparatively
new paradigm of finance and it could help in studies on investment management as it helps in
managing behavioural irrationalities and protects against some return-damning flows of
efficient market theory (Bagya Lakshmi, 2020). Investors tend to change their decisions
when they’re suffering losses, as losers tend to risk more, while they cash in on their gains
faster. This can lead to irrational decisions in some cases, when riding out their gains would
lead to higher gains in the future. (Su, 2018). If the biases talked about in behavioural finance
theories are informed to and considered by investors when making decisions, simply by being
aware of their own biases, they can be avoided. This would greatly increase the efficiency of
financial markets and reduce bubbles and crisis situations (Sharma, 2016).
RESEARCH GAP

While there has been considerable research in the field of behavioural finance, and the major
role it can play on investor decisions, narrative economics is an unexplored field. Narrative
economics is a subset of behavioural economics in a way but differs in the fact that it looks
for inconsistency and changes in human behaviour modelled by stories that go viral.
Schiller’s paper examined the prevalence of narratives in many fields of economics but failed
to consider financial markets. In Taffler, Agarwal, Wang’s research, they studied the Chinese
Stock Market and hence media reports on it. They did two sets of analysis, one based on data
in Chinese reports, and once on the Non-Chinese English reports. This led to discrepancies in
the analysis as the Chinese Investors seemed to have shorter memories, and were less
fascinated and affected by narratives and emotions. Therefore, in our research, we will try to
be more consistent with our sample sets so as to avoid discrepancies like these. In the papers
conducted on the impact of rumours on the fluctuations in stock prices, the impact of
narratives could only be speculated from the results, and no quantifiable relationship could be
established. We’ll attempt to conduct controlled experiments in which the impact of not only
industry rumours, but also personal narratives can be tracked with the stock market prices.
Broadly, almost none of the papers on narrative economics were able to carry out any
empirical research, and were only able to establish theorised relations. This adds to our
research gap, as we’re aiming to carry out an extensive empirical research into the role of
narrative economics.
In Behavioural finance, there is less or no research that has been undertaken on few
behavioural biases like gamblers fallacy, anchoring, representativeness etc, particularly in
India which provides a gap for further research. Behavioural research needs more outlets that
split theoretical research from applied research. By splitting these threads, a bit more, the
theoretical research area may benefit with very senior researchers reconciling the numerous
theoretical discoveries out there (i.e., the current theoretical base is fragmented). On the other
hand, applied work would have places to thrive because of its practicality and importance
(whereas applied work may be discriminated against too much in the current environment
because it does not expand theory or is viewed as atheoretical).