The Stories We Tell Ourselves:

The narrative fallacy deconstructed

Humans have a tendency to reduce complex events to much simpler ones. With things that move and are often not repeatable, this can get us into big trouble. Alas, it most often does.

As humans we love stories, it’s helped spread information for millennia but what we tend to do when we tell stories is summarise. We reduce it to a much simpler (oversimplified) set of events. Think of some of the monstrous events that have happened in the last 25 years or so. When we think of 9/11 we think of Bin Ladan organising a devastating attack on the Twin Towers or the 2008 financial crisis with sub-prime mortgages. These events, retrospectively seem easy to explain (hindsight bias) but the truth is there are hundreds if not thousands of tiny bits of the puzzle that were in place beforehand that we did not (or chose not to) see. Those two events were the last pieces of each puzzle.

The fallacy is associated with our vulnerability to overinterpretation and our predilection for compact stories over raw truths. It severely distorts our mental representation of the world; it is particularly acute when it comes to the rare event.

Nassim N. Taleb

So why is it that we lean towards cause-and-effect narratives? How can we continually misrepresent reality? Just try thinking about it and your head will hurt.

Daily, we have vast amounts of information thrown at us; visual, audio and sensational. If we were aware of everything and tried to process every single bit of information we just wouldn’t be able to cope. Imagine if we had to consciously remember to breathe and blink at the same time as landing a passenger airliner in a storm. It would probably be an unfortunate ending for the 250 persons on the plane, including yourself.

So with the trillions of pieces of information that are around us, we do what we can to make sense of it all. We weave narratives. Imagine if every time you drove your car you forgot what the colours represented on a traffic light and just stared at them trying to figure it out, all the while you have frantic drivers behind you screaming at you. Or worse, you go through a red and smash into a truck. Green is go, red is danger and amber is a warning. That’s an easy framework to remember.

Storing information is costly. When you read a book there are approximately 100,000 words. Nobody can remember every single word and if the author is good at their job they will give you narratives to help you remember and access the information (patterns) more easily. If the book consisted of a single word repeated it would be easy to remember. 2 words would still be easy but also twice as hard. 100,000 words is impossible. Stories help us process information, they help us to reduce complex random information into something we remember and can use. Or so we think.

Memory is more a self-serving dynamic revision machine: you remember the time you remembered the event and, without realising it, change the story at every subsequent remembrance

Nassim N. Taleb

Our ability to want to reduce information to more coherent parts helps us break down and understand the things that are happening around us but this same system works in reverse. When we remember past events what we really remember is the last time we told the story about that event. The time before that we remembered the last time before that and so on. Impossible! you might think but I’ve caught myself (and my friends) telling the same story in different ways. It’s not that they or I am a liar but that we tend to remember the story which we last told, whether it is correct or not. This is not the same thing politicians do though, they indeed quite often just lie for the sake of it. To compound this misstep in our functionality we tend to lean more when it comes to remembering things that fit our narrative. Think of the last time you had an argument with your partner. Of course, you think they are wrong and of course they think you are wrong but remember, there are always 3 sides to a story: yours, theirs and the truth!

If you think you are immune to this try it for yourself. Create a story, something exciting and tell it to your partner. Now tell it to your friends on the weekend after a few beers. Repeat every few weeks but don’t say I didn’t tell you so.

So we like to reduce and simplify information and you could argue that it’s an efficient way of going about our business and for the most part it is. After all, as the saying goes “Don’t let a lie (misremembering) get in the way of a good story”. The problem rears its ugly head though when things are a little more serious than embellishing a story among friends. It’s when we think that what happened was obvious and explainable (hindsight bias again). People who have significant power, whether in politics, academics or history CRAVE an explanation. How did the Allies and the Soviets beat the Nazis? We’re often told through bravery, sacrifice and grit and indeed all of those things are true but how much does luck play a part? Imagine Hitler, often in a fit of psychosis decided that instead of letting the Brits exit from Dunkirk with their tail between their legs decided to smash what was left of our troops and eliminate another opponent. What about if instead of pulling resources from the Atlantic he continued to terrorise the Brits and Americans with his U-Boats? And probably the biggest turning point of the war, what if he threw pride out the window and didn’t divert troops to try and take Stalingrad? We remember things in linearity and tend to ignore the ‘what ifs’. Hitler wasn’t the first person we thought wouldn’t do such heinous crimes and alas, he also won’t be the last.

Why did the market crash in 2008? Sub-prime mortgages obviously! We leave out the utter greed and ignorance beforehand and just reduce it to the fact that a lot of people couldn’t pay back a very shit sandwich they’d been given.

We have narratives for why the stock market moves up and down daily such as “The FTSE 100 moved up 0.1% today as King Charles visited France” Eyy?! It moves, up or down because there are thousands if not millions of bits of information daily that are fed into it.

The skill in investing and trading is trying to understand people’s behaviours and biases, not Mr Markets.

I’ve been reading The Black Swan by Nassim N. Taleb and in the coming weeks will have more to say on our biases and just how often we get things wrong. Have a great weekend!