Created by families, for families


The Power of Narrative

By A. Chase Reid, CFA, CFP®


Do you recognize the following story?

An aging patriarch runs a family business.  He has three sons and for health reasons is forced to choose a successor.  His oldest son is intelligent but brash.  His middle son is indifferent about the family business and unintelligent.  His youngest son is timid yet capable.  After his oldest son passes, the youngest son is left to take over the family business, something his father never wanted.  His youngest son is very successful and increases the business’s market share substantially.

This is my factual but dull retelling of the classic film The Godfather.

In my retelling of this story, I captured what happened – characters, setting, plot, conflict, resolution. Yet, the energy of the story was lost without the dialogue, actors, cinematography, and expert directing.  Recall the last few words of dialogue between Michael Corleone and his wife Kay in The Godfather:

Kay: (asking about Carlo’s murder) Michael, is it true?
Michael: Don’t ask me about my business, Kay.
Kay: Is it true?
Michael: Don’t ask me about my business…
Kay: No.
Michael: (slamming his hand on the desk) Enough! All right.
This one time, this one time I’ll let you ask me about my affairs.
Kay: Is it true? Is it?
Michael: No.

Even reading the dialogue does not fully capture Michael’s transition to the new head of the family, leaving his former self behind.

What is my point?  Story matters.  In fact, humans love stories.

We use stories for many purposes in our lives – to provide comfort, to rationalize decisions, to create arguments, to make people laugh.  But one of the flawed ways we use stories is to try to understand things too complex for our brains.

Nassim Nicholas Taleb was the first to give a name to this phenomenon in his bestselling book The Black Swan.  Taleb calls it the narrative fallacy.

“The narrative fallacy addresses our limited ability to look at sequences of facts without weaving an explanation into them, or, equivalently, forcing a logical link, an arrow of relationship upon them. Explanations bind facts together. They make them all the more easily remembered; they help them make more sense. Where this propensity can go wrong is when it increases our impression of understanding.” (Taleb, 2008)

Taleb references “our impression of understanding”.  This is a critical distinction from our actual understanding.  Below is a study to make Taleb’s point.

Consider the following passage from Thinking, Fast and Slow written by the Nobel Laureate Daniel Kahneman.  Here, Kahneman is sharing a study he performed:

Linda is thirty-one years old, single, outspoken, and very bright.  She majored in Philosophy.  As a student, she was deeply concerned with discrimination and social justice, and also participated in antinuclear demonstrations.

Which alternative is more probable?
1. Linda is a bank teller.
2. Linda is a bank teller and is active in the feminist movement.
(Kahneman, 2013)

Study participants overwhelming chose #2.  This answer is, of course, incorrect.  It is much more probable that Linda is only a bank teller.  Mathematically, there are more bank tellers than there are bank tellers who are also active in the feminist movement.  So, it is more probable that Linda is a bank teller only.

Did you fall prey to the trap answer?  Maybe you thought Linda was a bank teller who spent her nights and weekends fighting for women’s rights.  Then again, maybe you did not.  Maybe you collected yourself and recognized the word “probable” for what is was.  You saw right through Kahneman’s ruse and discovered the simple mathematical equation lying beneath the story.  Still, I hope you can imagine how you or any human might create a seemingly logical story about Linda which leads to answer #2.

Let’s consider a final story.  A story so complex that the probabilities are difficult to compute and the outcomes impossible to forecast.

On December 31, a pneumonia of unknown cause was reported to the World Health Organization’s China office originating in the city of Wuhan in Hubie province.  Over the coming days, the coronavirus that caused the strange pneumonia was given a name, COVID-19, and immediately began spreading across the globe.  As the virus spread, the number of people infected rose exponentially with many cases going undiagnosed.  Death tolls increased in China, South Korea, Iran, Italy, Spain, France, the UK, the United States, and many other nations.  Entire countries shut down in an attempt to contain the virus.  The global economy came to a screeching halt, and markets were in free fall.  Governments scrambled to contain the virus and address the significant shortages of medical personnel and equipment.  As death tolls continued to climb and economic effects began to be felt…

How do you think this story ends?  What are the eventual economic costs, death tolls, infection numbers, stock fluctuations, stimulus packages, interest rate changes, etc.?  It is impossible to know.  Further, it is impossible to know how all these bits of information will affect one another.

So how do humans react to a complex story like this?  We begin telling stories.  We play a dangerous game of connect the dots with an infinite number of dots.  Or we listen to someone else’s story.  Next, we make decisions based on these stories.  It’s a natural reaction, but it’s a flawed way to make decisions.

Consider the story of the stock market.  Over the past 100 years, we have experienced over 20 crisis events.  Each crisis had a vivid story to accompany it, yet the plot lines were the same: an unpredictable event occurs, markets react, over time markets recover, steadfast investors are made whole.  It really is that simple, but this presents our present challenge.

Will we focus on the boring plot lines or will we become engrossed in the story?

A Final Thought

I am writing this one day before the spring solstice.  Hints of spring are everywhere.  Out my window I see a flowering magnolia, blossoming tulips, and forsythia turning from yellow to green.  In light of the quarantine, my three-year-old daughter is out of school.  This morning my wife took her for a “nature walk” around the yard and down the street.  I saw her reach down and touch a tulip bulb for the very first time.  I wonder how that felt to her.

My seven-week-old daughter was in the stroller catching her first scents of spring – freshly mowed grass from our neighbor’s yard, honeysuckle vines that grow on our patio, and a field of daffodils.  And there was the warm sun.  Every spring has that first day when you feel the sun’s warmth for the first time in months.

These moments reminded me that all things change.  Change is the only constant.  No matter how dark, dreary, or damp winter is, spring shoots forward with no regard for the bleakness left by winter.

As humans, we naturally err by applying story to complex situations, but we naturally excel at coming together.  Our ability to come together has created knowledge beyond Einstein’s wildest dreams, art to be envied by da Vinci, music past Mozart’s imagination, and a country more prosperous than the founding fathers could have ever envisioned.

If we want a silver lining of this crisis, I suspect it is right in front of us.  It’s having kids home from college, sharing family meals, comforting each other, embracing your dog as your new co-worker, or seeking to help the suffering.

What will your story be of this crisis?

Will it be of frantic worry over the markets?  We already know how that story ends.  Or will your story be of spending time with those you love, seeking out the best in humanity, and doing our part to help our communities?

This story is real, and it is right in front of us.

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