act3 is a communication strategy and design firm that specializes in telling stories.

This blog is our story laboratory, a way to poke, prod, and take a closer look at the stories we see, the stories we tell, and our own assumptions and knowledge about why stories work (or don't). The goal is to better understand what makes a story connect with people, and how to tell better stories.

Like any blog, it's an evolving concept. We hope you'll follow along.

October 6

Stories: Unfortunately, guilty as charged

In “Be a Better Investor,” from the latest issue of Kiplinger’s Personal Finance, Senior Editor Bob Frick takes a look at the emotional reasons that fueled the irrational behavior that led, in part, to the economic morass from which we’re still attempting to extract ourselves.

Describing the past few years as an emotional roller coaster rather than a financial one, Frick fingers stories as a key culprit behind some of that irrational behavior:

Humans are wired to organize facts around stories. The Internet bubble was fueled by a fable that the Web would lead to an unending explosion of commerce. The explosion in real estate speculation that began in the early 2000s was firmly built on the same kind of fiction. Stories of people getting rich as property prices rose year after year “replicated and spread like thought viruses,” says Robert Shiller, the Yale economist who warned of the Internet and real estate bubbles in different editions of his book Irrational Exuberance. Such tales instill confidence in people and inspire them to move fast to get rich themselves.

These stories proliferate even when they fly in the face of facts. That’s because we tend to look only for facts that support our story, something called confirmation bias. So, for instance, real estate prices in Las Vegas and Phoenix rose at double-digit rates, as if land in those Sun Belt cities was a scarce commodity. The desire to cash in on the property boom ignored “obvious facts,” says [Nudge author Richard] Thaler, such as a virtually “infinite supply of land” that facilitated an abundant supply of homes.

For all of the malfeasance we might attribute to banks, investment firms, and the government institutions that should’ve been regulating them, it’s important to remember that we, as individual investors, borrowers, and home buyers, are complicit in this mess as well. As Frick suggests, so many of us bought a story we wanted to believe (“Housing prices just keep going up!”) and then looked for facts to confirm that story.

Don’t get me wrong — I’m not letting those greedy pigs on Wall Street off the hook here.

I’m just saying that if you don’t want to get burned when the next bubble bursts, you’d be wise not to underestimate the power of stories.

:: Posted by Eric Ratinoff ::