I always find it interesting when two bloggers come at the same idea at the same time but from different angles. It shouldn’t be a surprise to any one that we humans are storytelling creatures by nature. Before there ever was written language, humans passed down their histories and lessons via stories.
That is maybe why we investors are so prone to believing a good story told, even when the data itself don’t add up. One can think of the Internet bubble and bust as one big failed experiment in collective storytelling. Individual investors are particularly prone to this fault, but institutional investors are by no means immune.
Robert P. Seawright writing at Above the Market looks at the distinction between stories and data and writes:
We love stories. They help us to explain, understand and interpret the world around us. They also give us a frame of reference we can use to remember the concepts we take them to represent. Perhaps most significantly, we inherently prefer narrative to data — often to the detriment of our understanding because, unfortunately, our stories are also often steeped in error.
In the context of the markets, as elsewhere, we all like to think that we carefully gather and evaluate facts and data before coming to our conclusions and telling our stories. But we don’t.
One of our favorites Tom Brakke at the research puzzle has a post up that looks at this idea through the lens of anomalies:
Differential information is critical and early warnings are highly prized, yet as an industry we waste a lot of time borrowing and reinforcing conceptual structures that are already formed rather than trying to shoot holes in them. And most strive too hard to find analogies when anomalies are staring them in the face and going unrecognized or unexamined. Often they seem minor and are therefore easy to brush off as unimportant.
There is nothing wrong with a good story. Stories can illuminate and enlighten. The problem is that we humans are filled with all manner of biases that make us prone to believe a good story over cold hard data. Any investment strategy that is built on stories is prone to end with a common thematic element: heartbreak.
Items mentioned above:
Be entertained by stories; trust only the data. (Above the Market)
Analogies and anomalies. (the research puzzle)