The Stories We Fall For

- Roger Lowenstein

I KNOW AN investor who anthropomorphises the stock market, as if the Dow were a living beast. “Wouldn’t it be just like the market to draw us in with a rally, then deliver a sucker punch?” he will say, as if “the market” were a canny three-card monte player, entrapping tourists in Times Square.

Irrational as that may sound, it’s no more so than the ever-popular investing method known as “technical analysis”. This is a branch of astrology— chart interpretation—that purportedly “reads” the market, even though it tells you nothing about the underlying companies. You see a chart of zigs and zags and impute to it a story—the market is “exhausted”, or “bottoming”, or whatever.

Many investors are addicted to such fruitless techniques. Behavioural economics, which studies the impact of psychology on financial decision-making, explains why. It reflects what author Nassim Nicholas Taleb called the “narrative fallacy”. It’s the human tendency, actually the human need, to impose order on random events and to make events we didn’t anticipate seem “predictable” after the fact.

The narrative fallacy explains many common financial errors. The news is that it’s equally useful for understanding today’s conspiracy politics. It’s why, rather than accept that John F. Kennedy was killed by a lone, random gunman, we invented conspiracy theories—to spare us the ontological despair of acknowledging that chaos, not order, rules the universe.

Taleb’s