Thread by @jposhaughnessy

1/ Story time!
One of my followers asked about stories that illustrate why you shouldn't listen to stories/narratives about why you shouldn't rely just on them to make investment decisions. Here are a few:

2/ Let begin with you walking up with a horrible pain in your stomach. You've had it for a week or more and are worried. It just so happens your doctor has an opening that afternoon, so you grab the appointment to see if it might be something serious.

3/ You get to your doctor and describe the pain and he says "You're in luck! I just a had a pharmaceutical rep in and he told me the about how great these new little pills are for stomach problems. He said all of his friends and family have tried them, and the worked every time"

4/ He adds "You should try them too!" Would you? Or would you prefer that your doctor examined you to rule out some serious problems, isolated the problem and then said: "Not to worry, I think I have the right medicine for this. It's been through 100 double-blind tests

5/ on a large and diverse group of patients, and it has worked in 80% of the people who took the medication?" I'm going to go with option B, the one that is designed to my specific problem and has a huge amount of empirical support as to its efficacy.

6/ I doubt many people would have confidence in a doctor who said he was going to "wing your treatment based on a great story he just heard," yet that's exactly what you're doing if you buy a stock because you just heard a great story about it. Results may very indeed.

7/ How about life insurance? Do you think a company that based their decisions on who to insure based on how well they liked the candidate? Imagine going in and the rep saying to you: "You're young, healthy, have no family history of cancer or hear disease, but I don't like

8/ your attitude. I'm not giving you any insurance." Sound smart? What if the next person was 50 pounds overweight, had several severe health problems, a family history of heart disease and no male member of their family lived past 50 but they gave him a $10 million

9/ life insurance policy because he was the nicest guy they ever met and had a great story about how he had found just the right mix of exercise and what foods to eat that would help all his health problems vanish? Great story maybe, but Life insurance companies

10/ rely heavily on actuarial tables that look at a huge sample of the population and how long they are estimated to live based upon health, whether they smoke, are overweight, family history, etc. to determine who are the best bets to give insurance to--hint, young and healthy

11/ usually get the lowest rates. An insurance company that based policies on stories and not empirical evidence wouldn't be able to make good on the insurance claim because they would have gone bankrupt pretty quickly.

12/ we have a love of stories written into our DNA--before writing, it was the only way for the tribe to know its traditions, what went before them and why they did things the way they did. But now, we must enjoy the story and ask for proof. Trust, but verify.

13/ And yes. There are all sorts of great stories to back up why you should look for evidence that the odds are in your favor before doing something. But that's for another day.