What’s the Story on Narrative Bias?

According to PIMCO.com (see link below) Narrative Bias; “The narrative bias refers to our tendency to interpret information as being part of a larger story or pattern, regardless of whether the facts actually support the full narrative. Investors are likely to abandon evidence in favor of a good story about a specific stock or strategy. For example, the most admired stocks have the greatest stories, but they also tend to have the highest prices. While stories can be compelling, it’s important to consider the whole picture before making an investment decision.”

According to Psychology Today; “There is an upside to storytelling. Narrative can be therapeutic. It helps us to see past events as more predictable, more expected, and less random than they actually were. For example, breakups are less painful if you can devalue or vilify the ex, and if you want to disturb yourself, then the person you had doubts about three weeks ago can quickly become the One Who Got Away. Psychologist James Pennebaker uses writing as tool for healing. Patients who spend fifteen minutes every day writing an account of their daily troubles feel indeed better about what has befallen them. Things appear as if they were bound to happen. An important part of therapy is to help patients with troubled past to reframe their memories in more beneficial perspectives. People who dwell endlessly on their annoying problems may only make matters worse.”

An excellent description of the Narrative Bias can be even further captured in this article from Medium.com; “Investors tend to prefer investments that can be understood through a memorable or compelling story. For example, which of these stocks sounds like a more compelling buy to you?

1. A small cap technology company with stagnant sales growth and eight straight quarters of earnings losses has declined 50% from its 52-week high and now appears undervalued based on a range of well-established valuation metrics.

2. A struggling company that builds next-generation military technology just hired a brilliant new CEO to take over the firm and engineer a fast turnaround. During an interview today with CNBC’s Jim Cramer the CEO said:

I’m 100% confident in our turnaround. We’re going to double our investment in research and development and design new military technology that will completely transform the United States Army. You have a once-in-a-lifetime opportunity to buy our stock today in a half-off sale!” I think you get the picture, and this is why investors are so attracted to a Narrative that tickles their ears and makes them feel good.

So, what would be the elixir to succumbing to the Narrative Bias? We believe Clarity that is garnered from a strict Investment Philosophy & Strategy is the foundation for deterring any bias. And may we add, that within the realm of Clarity, the comfort of knowing what you and own why you own it, is the major deterrent behind negating the effects of the Narrative Bias. Don’t be duped by stories as we did as children but invest with the confidence garnered from Clarity.




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