The Little Book of Behavioral Investing: How not to be your own worst enemy

Chapter Ten

The Siren Song of Stories

Focusing on the Facts

 

 

 

 

 

 

OF ALL THE DANGERS THAT INVESTORS FACE, perhaps none is more seductive than the siren song of stories. Stories essentially govern the way we think. We will abandon evidence in favour of a good story. Taleb calls this tendency to be suckered by stories the narrative fallacy. As he writes in The Black Swan, “The fallacy is associated with our vulnerability to over-interpretation and our predilection for compact stories over raw truths. It severely distorts our mental representation of the world.”

To illustrate the danger of stories, let’s imagine you are a juror serving on a first degree murder trial. This is a trial like any other trial; the prosecution and the defense both present their cases. However, rather than deliberating as a jury you just write down whether you think the suspect is guilty or innocent. Let ’s say that 63 percent of people think the defendant is guilty.³⁹

Now imagine the same thing happens with a slight twist. This time the prosecution is allowed to tell a story, and the defense can only use witnesses to refute the claims. The same facts are revealed; it is just the format of the information that changes. The prosecution lays out the facts in a neat story order, but the defense must rely upon the facts randomly popping up as the witnesses testify. In a rational world, this obviously won ’t matter. However, guess the percentage of people who said the defendant was guilty this time around—a staggering ...