The Pied Piper effect

Around 1960, American psychologist David C. McClelland showed how differences in children’s textbooks seemed to be reflected in subsequent GDP growth. If, say, German textbooks painted a picture of little Hans as a diligent, hard-working child – a kid with high achievement motivation, in McClelland’s lingo – German growth would come to be higher than in countries with textbooks painting kids as unfocused dreamers.

Now, correlation is not causation, but McClelland spawned a lot of related research. One influential book titled A culture of growth argues that the intellectual turn toward reason, experimentation, and progress in Europe from the late 17^th century onwards played a central role in the first industrial revolution. A more recent contribution, based on textual analysis of more than 170,000 works printed in England between 1500 and 1900, points to a cultural evolution in attitudes towards science and progress.

The list could be made considerably longer. There is no dearth of articles or books postulating the importance of culture for economic growth and progress.

The times they are a-changin’, though, as described in this Financial Times article: “Over the past 60 years the west has begun to shift away from the culture of progress, and towards one of caution, worry and risk-aversion.” This is backed up by showing how the frequency of words related to progress and future rose for almost four hundred years and then peaked around 1960, while words related to caution, worry and risk have become more common. But I wouldn’t worry about that now.

Let me instead hold out a somewhat more peculiar angle – a recent paper inferring the risk of a stock price crash from folklore. The authors point out that folktales serve as a vehicle for conveying moral lessons and ethical values. While garnering much attention in cultural anthropology, folktales have been largely ignored in economics, which may not strike you as totally surprising.

Of particular interest is the way tricksters are being treated in these tales. They engage in antisocial behaviour, such as cheating, stealing and deceiving. Is this rewarded or punished? The researchers hypothesise that managers who grow up with stories in which tricksters often succeed “are more likely to withhold information and engage in unethical actions”. They also suggest that folklore provides a more reliable factor than, say, surveys of cultural values.

The link to stocks? Oral financial disclosures in earnings calls and managerial narratives of forward-looking R&D activities. The idea is that there could be systematic patterns in corporate oral communication that vary across countries due to folklore.

Indeed, using a sample of weekly returns for more than 460,000 firm-year observations across 48 countries, they find that countries whose folktales tend to punish tricksters experience less financial misbehaviour and, yes, a lower risk of stock price crashes. The statistical evidence looks robust.

Do note that the article is all about established folklore. It says nothing about contemporary tricksters holding public office.