Mistrust the Financial Storytellers
Courtesy of Tim Richards of the PsyFi Blog
Homo narratus
Homo sapiens is the storytelling ape. We make sense of the things that happen in the world, of the things that happen to us, and even of ourselves, through stories and narratives. Consciousness is perhaps best defined as the stories we tell of ourselves as coherent individuals passing through time.
So it's not surprising that we're inclined to favor people who tell stories over those who crunch data. Words are human, numbers – somehow – are not. But the real stories lie in the numbers and, in investment, people who tell stories without the numbers are mystics and shamans, or worse.
Meta-representation
Unfortunately the web is infested with investment websites that tell stories without backing them up with evidence. Many of these are attractive because they offer narratives that show people striving for financial independence, addressing very real challenges as they go, playing on the ability of a good storyteller to trigger those ancient mechanisms of meta-representation and theory of mind to inspire confidence and liking. But each individual storyteller's experience is just that – individual. Random events in a single person's life do not amount to a template for an investment strategy.
Hallucinogens
All too often, these websites extol the financial virtues of whatever financial philosophy they've chosen to follow over the well-trodden path favored by the multitudes. And to do this, of course, they must carefully cherry-pick their evidence and must favor introspection over analysis, because if they have no special insight into their chosen subject or into themselves they're just another wattle-dobed witchdoctor chanting incantations in a haze of drug induced hallucinations.
And this is why you'll find the majority of investment websites peddling pet theories which at best ignore this evidence and, at worst, actively argue against it based on personal experience. To the extent that investing is an offshoot of psychology this is a well-worn path – psychology has been beset from the outset by the argument that individual experience – so called phenomenology – should take precedence over controlled studies because the latter ignore the nature of what's going on in our heads: they remove the very essence of what it is to be human.
The argument is that personal experience is just as valid as "objective" studies and is not transferable, but the main point is that it shouldn't be represented as representative. My experience of the world may be no less valid than yours but no matter how much I may believe that science is subjective the fact is I'd prefer my planes to be designed by aeronautical engineers trying to be objective and not existential philosophers arguing that objectivity is an illusion – a position which is utter nonsense, as revealed in the saga of Sokel's Hoax.
Of course, this hasn't stopped some very clever people from attempting to argue that personal experiences are representative. The most famous versions of phenomenology are those promoted by Freud and Jung, and if there has ever been an example of narrative and storytelling usurping evidence and attempting to masquerade as science then that was it. Freudian psychodynamics is, in fact, based on the leading technological revolution of its time – hydraulics. Hence it's full of emotional metaphors about pressure and release, dams and reservoirs. It all makes human sense, it appeals to our emotional centers, it's a brilliant narrative; but that's all it is – it's not science and it's not true.
Emotions
In fact the debate between the proponents of individualistic emotional experience and generalized scientific evidence is a false dichotomy. Emotions are at the heart of behavioral psychology because the rational human mind cannot be separated from the emotional one – emotions evolved to help us make decisions, so ignoring them (as much of 20th century psychology and virtually all of 20th century economics did) isn't so much foolish as deluded (see, for example: Get an Emotional Margin of Safety). Much of the research into behavioral psychology and finance in the last fifty years has been about finding ways of accessing those internal personal experiences and turning them into external, impersonal data.
There are, perhaps, even worse investing offerings out there than the non-evidence based ones – there are the fakirs who drape themselves in the respectability of evidence. As we saw in T is for Texas Sharpshooter Effect it's incredibly easy to find some data that supports your pet theory and then present this to the world as the incontrovertible proof of your particular party piece. Even better it's possible to mine the data to find illusory correlations which can then be waved about as "proof": see Twits, Butter and the SuperBowl Effect. But in a world of infinite data there's evidence for everything if you can't – or won't – attenuate the noise.
The Meaning of Money
As I've discussed many times before, to find meaning in life and a purpose for investing we need to look inside ourselves and away from finance. Money is not and never will be an end in itself, and no matter how much of it you obtain it will never, ever make you happy – especially if you baseline yourself against the neighbors.
But if the purpose of investing is to make money in order to fund the things that will make us happy then we need to do it properly, and not muddle it up with confused narratives that trigger inappropriate subjective responses to roughly objective decisions. So don't treat investing like a narrative in which you're a protagonist and don't read websites that describe investing that way because they're using the same psychological triggers that make narratives so attractive.
For entertainment read fiction, watch movies, go to the theater and be inspired by what you see, but for investing seek out the writers who draw on personal experience to illuminate general principles backed up by evidence and data. They're out there if you look hard enough.
(P.S. You can find lots through the curated and aggregated content of the forecast free Abnormal Returns).