Narratives

”Jargon seems to be (the only place) where the right brain and the le^ brain meet”

Aswath Damodaran

Doctors/psychologists have defined how 2 sides of our brain-left & right. works differently from each other.

Left/Right Combo

The left side is characterized as Linear, logical things and reality based, while,

The Right side is characterized as big picture, intuitive, processing information on touch & feel rather than looking at letters, words or numbers.

Right side is supposed to be more creative than the left while the left is considered more analytical.

Not to say that more people are left brain or right.

In fact, brain imaging has found that most people are brain ambidextrous i.e., they use both side of their brain well.

it is easier for most people to understand a story rather than look at complex numbers and try to make sense out of them, left & right working together can be a very powerful tool.

Decision Making is complex

Narrative people think that stories matter more than the numbers while for numbers folks logic is the only way to move forward.

However, decision making is often a complex process that needs to marry not just numbers that make logical sense but also the human biases, aspirations, fear and needs.

There are 3 commong ways to convince people to take a decision:

  • Logic
  • Fear & Intimidation.
  • Influence

Overtime psychologists, marketers and ad men have found that influencing is perhaps the only way a person will not only make a decision gladly but will be even happy to justify it for long.

This is where narrative becomes bigger than the numbers.

Marketer’s Dream

Overtime as people understood the phenomenon, the process to marry the right and left started in sales and marketing.

While left side creates the numbers, the right side creates the narrative.

An honest marketer will make sure that numbers are in place instead of making a good pitch for a bad decision (for the customer), however when the number game overpowers and the need to own the latest “HOT ITEM” is high, narrative starts playing a bigger role.

It’s astonishing what a number on a deck can do when people are ready to justify their decisions.

2008-Narrative Weds Numbers

You Are Invited

If you need a marriage of different factors to create a disaster, 2008 is your prime example to go to.

In 2000, S&P 500 peaked at around 2300 or there abouts.

After all the ups and downs it was still at around 2000 in Oct 2007.

Equity investors having lost their shirt in the dotcom bubble didn’t have the guts to get back, however they were still crying for yield.

On the other hand, till 2004 interests’ rates were low leading to growth in housing market that was led by sub-prime mortgage which essentially means loans being given to people with low credit score and who would otherwise not get such a loan.

These loans were not only given at a higher rate and the terms of loan were in favour of the lender and lot of transactions were fraudulent. Everyone was trying to maximise returns.

Therefore, as it often happens and cause equity markets were not working, Wall Street created the mortgage-backed securities (MBS) that further aggravated the risk by combining these risky loans into AAA rated securities that were sold to investors as high yield products deemed safe.

Even sophisticated investors like banks had a lot of such risky assets on their balance sheet without enough capital cover.

Between 1998 to 2006, the value for such securities increased from 148 Bn USD to 1.2 Tn USD and their total shares of securitization market went from 18% to 56%.

When Fed went on its aggressive rate increase mission between 2004 to 2006 increasing rates by over 4% and home prices dropped these securities became worthless

The narrative was great here:

  • Low interest rates;
  • House as security
  • Product was hundreds of individuals loans leading to low risk
  • High Yield

Everything that will win over an investor-Narrative weds Numbers;

Unfortunately the marriage ended in suicide

Narratives winning over Numbers

If the treasury departments or Advisor of the client would have looked at the numbers and the worth of the underlying loans, they would have realised the risk.

However when the need is for higher yield and the entire market is going in one direction, the Narrative is stronger than the Numbers.

No-one wants a marriage of the 2, they are seeking to justify the decision.

Lessons

A blog cannot take away the flaws in human decision making.

Logically investor should be looking to protect their interest and hence look at not just narrative but also the number.

However biases and noise in decision making restricts investors from doing so and a good marketer will always marry the 2 as if they are “Made for Each Other”.

As I say often, have a “Fun Money” allocation with which you can play some narratives even if numbers are not strong so you don’t get “FOMO” or you want to justify the narratives.

For the rest of your money, marry “narratives with numbers” genuinely.

It’s not easy and you need a strong guiding hand-

Reach out on manish.verma@manishverma.co.in or 9920741569 for guidance

Follow my twitter handle irreverentinvestor @manver1974 for more such shares

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