The Trouble with Narrative Reasoning Weekly Update 6/29/2018

The Trouble with Narrative Reasoning Weekly Update 6/29/2018

by Zach Marsh on Jun 29, 2018

Weekly Recap
S&P 500   -1.07%
10 Year US Treasury  +0.40%
Gold    -1.41%
Volatility  +15.69%

The Trouble with Narrative Reasoning

As someone who loves to write, it’s a difficult to admit that the narrative form, when employed improperly, has frequently been a weapon of mass destruction.  The Vietnam War was fought based on the narrative of the Domino Effect.  The Iraq War was fought based on the narrative of WMDs ending up in the hands of terrorists.  No entity is more adept at exploiting cognitive biases via narrative reasoning than governments, perhaps aided by the media.  Political parties engage in a constant struggle to define and control the narrative of each political debate.  They do this because they understand that once a narrative becomes dominant, disrupting it becomes extremely difficult. 

I’m not contending people deliberately conspire to maliciously exploit cognitive biases via narrative reasoning.  Well, strike that, maybe only some of the time do people do it intentionally.  My contention is that these things happen, either with good intent or no intent at all.  In the financial industry there is an entire profession of stock analysts and economists whose occupation is to decipher information and deliver a narrative reason for owning a particular stock, or the stock market as a whole.  The better the story, the greater likelihood someone will buy it.  So, the industry, as a whole, ends up narrowing down investments simply to what is easier to deliver and swallow.  As I was told early on at my previous employment, “People buy the sizzle not the steak.”  My problem was, I actually enjoy the steak, after all there is no nutrition in the sizzle.

One problem with listening to analysts (the sizzle) is that they are exposed to the same challenges as everyone else:  basing decisions on selective information.  As humans, some information we deliberately ignore; like reading or listening to news sources which support our already determined viewpoint.  Other information is unintentionally ignored because we just don’t see it.  In behavioral economics the first is called confirmation bias and the second is a form of selection bias. 

I was thinking about this as I was driving to work the other day.  I work in downtown Des Moines.  The sidewalks, while perfectly usable are frequently empty due to a system of enclosed bridges connecting the buildings in the downtown area (“The Skywalk” for those who live here.).  This particular morning, as I was pulling into the parking garage, I saw a blind man walking with his cane.  I remarked to myself that this is quite common in downtown.  While there is a particularly reasonable explanation for this, there is a school for the blind in downtown Des Moines which helps people learn how to navigate, however if I were a stranger from a strange land, without this information, it would all appear quite different.  Zeroing in on downtown Des Moines with my telescope on my faraway planet I might reasonably deduce that there is a high percentage of blind people living in Des Moines.  The percentage of people walking on the sidewalks is highly skewed, compared to other locations, toward the blind.  Not knowing about the school or seeing people walking in the skywalk system my assumption would be quite reasonable.  Furthermore, I might conclude, erroneously mind you, that there must also be something causing this phenomenon, perhaps there is something in the water in this peculiar city.  All of this would seem quite logical to me on my distant planet, and as I was reporting this information back to my fellow aliens they would reasonably determine, the same as me, to avoid the city on their next visit.  This illuminates the problem with this form of reasoning, absent pertinent information, receiving some information is actually worse than receiving no information.      

It struck me that this is not unlike the process analysts around the world engage in on a daily basis.  Making calls and decisions with a fraction of information and then subjectively valuing that information’s importance.  The next time you read online about some analyst’s prediction about the economy or about the price of Apple stock, remember it was made given only a fraction of the information.  Total information, after all, is an impossibility. 

So, let’s settle in for the 4th and get ready for the start of the summer news cycle, or more precisely the battle for the narrative.  And hey, don’t worry, shark attacks are not on the rise, California is not about to be destroyed, and the world is not about to end…it’ll only just appear that way.     


Happy Independence Day,

Zach and Dave