MONKEY WITH A PIN
Tell me a story with a happy ending Investors, and not just new investors, are all swayed too heavily by stories. Stories are schemas that help us make sense of the world. The better the story, the more credible we think it is and the more likely we are to buy a share because of them. As an example of how we are influenced in this way, James Montier quotes a great example of how some jurors completely abandon the evidence in favour of a good story.10 In a murder trial experiment, jurors listen to the basic facts of a murder trial and 63% say the defendant is guilty (this is the control). If the same facts are instead presented by the prosecution using a story to re-tell events, the number saying he is guilty rises to 78%. If, on the other hand, the defence uses a story to portray its facts, only 31% say he is guilty, ie, much less than half than when the prosecution tells the story. Some of the best examples of stories used in the investing world are for IPOs (offerings of shares in a new company). Great efforts are made by advisers to ensure the stock is taken up and the story is as watertight as possible. According to Montier, the average IPO share has underperformed the market by 21% in the three years after listing (1980–2007). We rest our case, m’lord. Therefore, ensure you focus on facts and try and ignore emotional content in stories when evaluating share purchases.
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