Narrative & Data

Irreconcilable differences in the realm of interpretation

We humans love our stories and our storytellers. We think in story form via images in our mind, so it is only natural that we convert information through this lens. I would go so far as to say that it is an inherent human bias to favor information presented in story format.

I have been on a journey of discovery over recent years where I could no longer accept the ‘institutional world’ way of things and decided to step away and begin thinking for myself. In my case, this was specifically in relation to the framework around which institutional investing is conducted. Institutional investors - even the largest and most famous Wall St. brands - operate on a narrative basis. That is, they make investment decisions based on their interpretation of the world using events as their key inputs. And when I say “events”, I mean news headlines. These people string together the endless stream of news headlines and attempt to use these to decide what financial markets are going to do. I don’t know if you’ve noticed, but this piecemeal approach hasn’t been very effective for the last … well, more decades than I’ve been alive anyway. When was the last time that any of these large, famous name organizations enhanced the performance of their client’s investments during a downturn? Never! Their clients still lost as much money as the market decided to fall, give or take few percent.

When story-telling goes bad

The problem is in the process, but also in ourselves. We humans naturally default to fitting new information into existing belief systems - the stories we have created in our mind. We tend toward ‘narrative fitting’ where we force information to conform in such a way that we don’t have to alter our beliefs or internal thought structures. And most of us are unaware that we do it.

I spent many of my younger years in a church environment. I did a lot of study along theological lines because I have always been of a philosophical disposition. I noticed the behavior I described above in church circles also. I found that most of the Christian faith assimilated their theology by association, absorbing ideas of what “we believe” on the basis of their community and what was considered collectively acceptable conduct (most of which was unspoken) rather than applying any effort to gain a true theological understanding of what it was they actually were theoretically supposed to believe based on their religious affiliation. This was made doubly clear to me when I did a course on exegesis. Through that course I was forced to challenge my own internal constructs of faith by looking at New Testament scripture on the basis that much of it was letters sent by an individual to either another individual or to a specific group of people, and that to interpret these writings correctly required that I gain an understanding of the society and circumstances of the people involved during the time that these letters were written. The outcome is vastly different to trying to take mere words at face value and interpret them within the context of our modern day society.

Here’s another quick example: Astrology has seen a resurgence in recent years, particularly among the young. I can see both the appeal and our societal changes in this trend. Have you noticed that we as a society are slowly moving from institutional structures to more individual structures? We’ve gone from kingdoms (where a single person sits atop) to democracies; we’ve gone from institutional religion by way on a priesthood standing between the people and their deity to having a “personal relationship with Jesus”, for example (a blend of institutional & personal), to now, with astrology, each person has a unique personal birth chart, and the interpretation of their ‘spiritual’ journey is an individual thing. Anyhow, I digress. The reason I mention astrology is because the construct of the narratives often include concepts such as “past lives”. That is to say, a story around what the person’s birth chart tells them requires the construct of something about which there is no way of knowing, but for some reason we feel the need to construct such a story … just to make everything fit.

Getting back to finance, every piece I receive from economists - and I get them almost daily and have done for over 30 years - is primarily a narrative-based construct. That is to say, economic information is formed into a story of likely outcomes, but no data-based quantification is provided. I think this is largely to do with the way economists are educated. They all appear to use regression-based mathematical models, i.e. everything will return to average over the long run, which I pointed out 6 months ago when I wrote “Experts” don't think human, rather than allowing for any cyclicality (which is very human-like behavior) in markets or the economy.

My journey

My journey (which may or may not be written in my birth chart😉) has seen me open myself to data and letting that tell me what is going on, even if it requires me to change my thinking or belief structure. It has surprised me how rare this talent is because I have seen some very capable people when it comes to gathering and presenting data fall at the interpretation hurdle. Perhaps I shouldn’t be surprised, because the one area I have observed among humans where they the most inflexible is around their beliefs, and I’m not just talking religious. You try telling parents that you don’t think they’re raising their children the right way and see how get on (I’ve never tried this, but when I was raising my own children I observed this as being an area where humans were extremely sensitive - probably more so than their religious or political beliefs). As an aside, I didn’t always hold my beliefs with the current light-handedness that now allows me to change them at will (or when data challenges narrative) and also means accurate interpretation comes more easily to me (because I don’t care which way it falls, I just want the truth), but I’ve found that sometimes personal crisis can require adaptation, and that was an evolutionary change I experienced some 14 years ago. I can only say that acquiring this skill came at a high cost.

Right! That pretty much gets me back to where I started this article.

Yes Virginia, U.S. stocks really will fall 65%

I keep coming back to my recent major insight. It is so significant because it uses data to prove that our understanding of the economy and markets is, and has been, wrong. The narrative changes across each economic cycle, but for the last 75 years the outcome has had nothing to do with the prevailing narrative except maybe as a catalyst (i.e. the match & not the dynamite). You can research historical causes of market crashes and you will get stories, but I have the data, and that tells us the real story.

The U.S. stock market will fall 65% in this cycle even though the historical narrative that will be deemed the cause in retrospect may or may not have come to light yet (it’s actually rising interest rates in response to inflation, but only time will tell if that is how the ‘official’ historical record reports it).