Fortune

THE STORIES WE FALL FOR

Humans crave narratives that impose order and make sense of random events. But this phenomenon, the “narrative fallacy,” can create serious problems—in the markets and in politics.

I KNOW AN investor who anthropomorphizes the stock market, as if the Dow were a living beast. “Wouldn’t it be just like the market to draw us in with a rally, then deliver a sucker punch?” he will say, as if “the market” were a canny three-card monte player, entrapping tourists in Times Square.

Irrational as that may sound, it’s no more so than the ever-popular investing method known as “technical analysis.” This is a branch of astrology—chart interpretation—that purportedly “reads” the market, even though it tells you nothing about the underlying companies. You see a chart of zigs and zags and impute to it a story—the market is “exhausted,” or “bottoming,”

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