Investors often fall victim to narrative fallacy from "summary" of The Little Book of Behavioral Investing by James Montier
One of the most common pitfalls that investors face is the tendency to fall prey to what is known as the narrative fallacy. This fallacy occurs when individuals create a story or narrative to explain past events or predict future outcomes. The problem with this approach is that it often leads to misconceptions and faulty reasoning. When investors succumb to the narrative fallacy, they tend to overlook important information that doesn't fit into their story. They become fixated on a particular narrative and filter out any evidence that contradicts it. This can lead to poor decision-making and missed opportunities in the financial markets. Moreover, the human brain is wired to seek patterns and meaning in the world around us. This natural inclination can be a double-edged sword when it comes to investing. While pattern recognition can be a useful skill, it can also lead investors a...
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