EFFECT OF NARRATIVE FALLACY BIAS IN INVESTMENT BEHAVIOUR

Abstract

Nassim Nicholas Taleb, a well-known scholar and financial trader, coined the term "the narrative fallacy" to describe this obsessive behaviour of making connections between seemingly unrelated events in order to excessively simplify reality. Taleb stated: "The narrative fallacy addresses our limited ability to look at sequences of facts without weaving an explanation into them" in his 2007 best-seller "The Black Swan". When it heightens our sense of understanding, this tendency has the potential to be problematic. It deserves to go without saying that the narrative fallacy can increase the likelihood that both professional and ordinary investors get too wedded to a specific tale about the market. Investors swarm into high-priced investments like well-known companies, touted coins, or glitzy funds based on glossy magazine stories about their rags-to riches founders, developers, or asset managers, which makes this point very evident. In a perfect world, while making an investment choice, investors would only consider the cold, hard facts. But as of right now, we are aware that none of these choices are entirely sensible. Even the most logical investors' decisions always contain a tiny bit of emotion. This dissertation looks into the world of investing in an effort to demonstrate and explain how humans have a propensity to see patterns everywhere and to construct tales out of them. Without a thorough investigation for causes, we would be walking around with blinkers on and things would just keep happening.