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Investing is no place for ‘Once upon a time …’

Human beings may love stories but you do need to be very careful about imposing them on investment or market situations where they just do not belong

30/05/2018

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

Once upon a time there lived a little pixie, who went to see a wise old wizard to ask him a question.

“Why was the Fairyland stockmarket down today?” asked the pixie. “Because there were more sellers than buyers,” shrugged the wizard. “And if the market should rise tomorrow, it will be because there are more buyers than sellers.” “Oh,” said the pixie. “To be honest, I was hoping for a more exciting explanation.”

And that is just one reason why, here on The Value Perspective, we leave writing bedtime stories to others.

Another thing we try and avoid with stories is introducing them into our day jobs as a way of imposing order or logic on a particular investment or market situation.

This very human instinct, which boils down to the idea that people do like a bit of a story, is known by behavioural scientists as ‘narrative fallacy’.

Narrative fallacy

The snag with adding any kind of narrative gloss to an investment scenario, as we have discussed in pieces such as End of story, is this can cloud an objective analysis of the available facts.

As an example, highlighting one particular version of a future that can of course play out in any number of unpredictable ways introduces the risk that we become psychologically attached to our one pet view.

As with many potential pitfalls in the world of behavioural finance, the twist here is your brain is hardwired not to act in your best investment interests – in other words, investors make these mistakes instinctively.

'Split-brains'

In the case of narrative fallacy, this is strikingly illustrated by a series of experiments conducted through the second half of the 20th Century on so-called ‘split-brain’ patients.

Between the 1940s and the 1980s, neuroscientists developed a drastic treatment for people exhibiting certain neurological symptoms that involved severing the ‘corpus callosum’ – the bundle of neuronal fibres that links the left and right hemispheres of the brain.

While helping to control one of a patient’s symptoms, this surgical ‘firebreak’ also meant the left side of their brain quite literally no longer knew what the right side was doing – and vice versa.

This article from Nature journal covers the whole subject in a lot more detail but, briefly, the experiments mentioned above originated from tasks where US neuroscientist Michael Gazzaniga would ask a split-brain person to explain in words, which uses the left hemisphere of the brain, an action that had been directed to and carried out only by the right side.

Gazzaniga found that the left side of the brain would make up an off-the-cuff answer that fitted the situation.

In one experiment, for example, he flashed the word ‘smile’ to a patient’s right hemisphere and the word ‘face’ to the left hemisphere, and asked the patient to draw what he had seen.

When the patient drew a smiling face with his right hand, Gazzaniga asked why he had done so.

The patient replied: “'What do you want – a sad face? Who wants a sad face around?”

According to, Gazzaniga, this left-brain interpretation is what everyone uses to seek explanations for events – as a way of imposing some sort of order on the constant stream of incoming information the world throws at us and constructing narratives that help make sense of it all. 

The split-brain experiments may be an extreme illustration of narrative fallacy but, as human beings, investors risk falling into the trap every day.

Take the following example, which comes from the most recent annual report of global energy company Repsol and shows the movements in the oil price over the course of 2017 – along with its research unit’s explanations for the dozen most significant ups and downs.

Past performance is not a guide to future performance and may not be repeated. 

Such commitment to the idea every aspect of finance and markets needs to be accompanied by a story would probably have been more exciting for our little pixie but – as the wise old wizard said, and dull as it may be – the oil price really only moved because sometimes buyers outnumbered sellers and sometimes it was the other way round. 

Author

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst. 

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