Investment Narrative

Audiences cry at predictable stages in Hamlet and The Lion King. They are, at a level, the same story. They share a narrative calculus. The fatherless prince with a murderous uncle undergoes a hero’s journey. Death, exile and revenge are pivots. And the protagonist’s internal struggles become ours. We are moved.

This is no accident. Neither plot is arbitrarily conjured up by independent creative minds. Rather, biology is at play. Humans evolved not only to think in narrative, but with a limited number of narrative arcs built into our heads like blueprints. These are the window frames through which we see the world. Moreover, they are the structures we use to make the world.

As historian and author of Sapiens Yuval Noah Harari puts it, “only Sapiens can talk about entire kinds of entities that they have never seen, touched, or smelled”. And it is the ability to conjure up these otherwise non-existent entities – from religions and countries to fiat currency and corporations – that has made people the dominant animals on Earth. Our large-scale cooperation “is rooted in common myths that exist only in people’s collective imagination,” concludes Harari. It is on this basis that one might call us not Homo Sapiens (“thinking person”), but Homo Narratus (“storytelling person”).

So inbuilt is narrative, that not even our most calculating spheres is free from its power. Chess legend Garry Kasparov has argued that it is this human need to grasp the world through story that tripped up many opponents over the years. “The biggest problem,” he says, “was that even the players would fall into the trap of seeing each game of chess as a story, a coherent narrative with a beginning and a middle and a finish, with a few twists and turns along the way. And, of course, a moral at the end of the story”. All of this from 64 squares, 32 pieces and a handful of rules. It should come as no surprise that in commerce, too, we are creatures of narrative.

Spearheading the movement to better understand how narrative impacts markets is 2013 Nobel laureate Bob Shiller. The Yale professor unleashed the trailblazing field of narrative economics in his 2017 with his presidential address to the American Economic Association. The keystone of his argument: “The field of economics should be expanded to include serious quantitative study of changing popular narratives.” Shiller appropriately went on to create his own popular narrative in 2019 with his award-winning book, Narrative Economics: How Stories Go Viral and Drive Major Economic Events.

At a micro level, there is growing evidence that valuations of companies and other assets is a mental mixing of mathematics and psychology where our brains use numbers and other data to generate narratives. Our eyes read a discounted cashflow of X; our brain seeks out a visionary leader with a gadget that solves problems. Our ears hear a multiple of Y; our mind looks for the hero who made it happen.

Regardless of the setting, we also use stories to build the conviction we need to act when faced with a choice to be made in the face of uncertainty. Work by the likes of Prof. David Tuckett at the Centre for the Study of Decision-Making Uncertainty at University College London provides us with a system for understanding, and therefore manipulating, decision-making. Tuckett’s conviction narrative theory (CNT) is a powerful tool both to influence how decisions are made and improve our own decision-making prowess.

The power of CNT lies in its ability to direct us towards the characteristics of a story that help to build the conviction to act. We can put a firm finger on the scale with the right “attractors” and “doubt-repellors”. We can press the buttons that have the strongest influence on investors and capital allocators.

Of course, the inverse is true when wearing the investor’s hat. By understanding our own triggers, we can make better investment decisions.

At Investment Narrative, we help you to find and tell your story:

Your funders, employees and customers have a story about you and your business. That is the only way people can reduce the complexity of a living, changing organisation into code the brain understands. The story is people and connections. It is imagined futures. It is an explanation for anticipated success or failure. You can be subject to these narratives. Or you can embrace them and guide them.

We help you understand a world swayed by tweets:

Stock price changes and political movements. These are narratives. And they move the world. The stories we share over lunch and the tales that we tweet are the things that - in aggregate - move markets and dislodge governments. We provide you the tools to better understand these narratives and therefore prepare your business for the power they wield.