Stories shape how we see the world. They help us make sense of big, complicated topics like the economy and investing. The problem is that stories can also distort reality. When we hear a friend talk about losing money in the market, or when the news zeroes in on negative events, our brains start connecting dots that may not belong together. Before long, a single moment becomes a sweeping narrative about where the economy is headed.
This tendency can fuel a pessimistic outlook that feels rational but often leads to emotional and risk-averse financial decisions. Understanding why this happens is the first step toward avoiding it.
Narrative bias is our instinct to favor stories over statistics. We tend to interpret information as part of an overarching theme, pattern, or story, regardless of whether or not there’s proof of the information being linked. Our brains are wired to seek out patterns, and sometimes, they create patterns that aren’t really there. This phenomenon is known as illusory correlation. False connections can also play into multiple other biases and fallacies, such as the gambler’s fallacy, confirmation bias, and availability bias.
In finance, narrative bias tricks us into believing that a handful of experiences, opinions, or short-term market movements reveal deeper truths about long-term trends. This keeps us from assessing situations through a clear lens due to a skewed perception.
Illusory correlation and the gambler’s fallacy often go hand in hand. We tend to interpret the outcomes of singular situations as part of a larger story, rather than unrelated variables. This ties into what’s known as the gambler’s fallacy, which is the belief that past events can influence future outcomes in systems that are actually independent. A classic example is the belief that after a coin lands on heads five times, the next flip is more likely to be tails. Each flip is still fifty-fifty, but the story we tell ourselves says otherwise. When applied to investing, this leads people to assume the market is “due” for a crash or that a recent upswing guarantees future gains.
As Founder and CEO of PFW Advisors, I see this regularly in my work. High returns can trick investors into feeling confident about a specific stock or the market as a whole. In reality, these elevated valuations can signal a need for caution.
Currently, we're sitting at the highest valuations that we've seen since the dot-com bubble, in large part due to the rapid growth of AI companies. The hype surrounding AI technology is motivating many investors to join in, further driving up prices. Simply by what you’re paying for every dollar of earnings right now, you’re paying a premium for historic returns.
If you only focused on current valuations, you’d say that the market is doing amazingly well. However, things can always change; the last time the level of valuation was anywhere close to this was right before the dot-com bubble burst.
All this to say, there’s more going on in the economy and the momentum of the market than there is anything predictable. Near-term trends aren’t always predictive of future gains or losses.
Stories hit us emotionally, while statistics do not. If a close friend claims the economy is on the brink of collapse, their perspective may influence us far more than data showing steady long-term growth. Even when the numbers contradict the story, most people trust those close to them more. This isn’t because we’re irrational, but because our brains evolved to value social signals. When someone in our circle is worried, we feel compelled to take that worry seriously. Our brains were built for campfires, not spreadsheets. Long before anyone tracked stock valuations or GDP growth, humans survived by sharing stories that helped them remember danger, opportunity, and social rules.
Stories carry emotion, and when someone close to us shares a personal experience with fear, loss, or stress, our own nervous system reacts as if we are feeling it too. That emotional resonance makes the story feel real and urgent in a way data rarely does. We also tend to trust the people in our circles more than distant institutions, so a single friend’s negative experience can outweigh broad economic research.
Stories are easy for the brain to store and recall, while statistics require interpretation and mental effort. The mind prefers the path of least resistance, so anecdotes shared by our family and friends often influence us even when the data paints a very different picture.
Narrative bias thrives in environments where people share similar values, beliefs, and experiences. Social media, peer groups, and political communities all reinforce specific viewpoints, and these viewpoints often turn negative during periods of uncertainty. This, in turn, fuels negativity bias.
I often see this in two common situations:
These patterns show how narrative bias and negativity bias can work together. They tend to form a feedback loop in times of economic uncertainty and political instability.
Our brains evolved to prioritize potential threats over neutral or positive information. It’s literally human nature. For early humans, noticing danger quickly was a survival skill, so the mind developed a habit of scanning for risks first. That instinct never went away.
Today, even though most modern dangers are psychological or financial rather than physical, the brain still treats negative information as more important and more urgent. A single bad headline or market dip has a stronger emotional impact than a dozen positive trends because our minds are wired to react strongly to anything that hints at loss.
This is especially true if someone grew up in or currently lives in difficult financial circumstances, such as poverty. If you've lived in an environment that feels risky and scary, you’re going to make sure that you're protecting yourself or avoiding some of the same things you had to avoid when you were in that situation. This protective mechanism is natural, but it can work against us when we are making decisions about long-term financial planning.
Narrative bias encourages us to interpret every spike or dip as the first chapter of a bigger story, but that mindset pulls investors away from a reliable long-term strategy. Short-term swings in the market feel meaningful in the moment, but they aren’t dependable indicators of long-term impacts.
The market’s momentum is influenced by many unpredictable variables. High returns never last forever, and short-term pullbacks are not indicators of long-term decline. When you step back and look at the fundamentals rather than the story, you get a clearer picture.
In a world overflowing with opinions, headlines, and quick takes, objective analysis has never mattered more. The best way to combat biases is by relying on data to look past your initial reactions and see what’s actually happening.
I recommend viewing investments through the lens of what you are paying compared to the company’s long-term valuation. Two of the most reliable tools are the price-to-earnings multiple and the free cash flow of a company. Both help you understand if you are overpaying or underpaying for a company’s stock.
In this day and age, information is readily available. What’s more important is educating yourself on how to understand and interpret the fundamentals driving the overall economy. The momentum of a stock during a high period can be disconnected from a company’s long-term valuation. Rational financial decisions aren’t always easy, but having solid data to depend on can help make them a little easier.
Consulting with an expert, such as at PFW Advisors, can give you an objective perspective that can be difficult to maintain on your own. Behavioral biases tend to creep in quietly, especially when markets feel chaotic or when personal experiences skew your expectations. An advisor can help you separate emotional reactions from logical strategy by grounding decisions in fundamentals rather than fluctuations. An advisor brings clarity to the numbers, explains what you are actually paying for in each investment, and helps you evaluate long-term value instead of getting swept up in stories or headlines.
Narrative bias is part of being human, but that doesn’t mean it has to dictate your financial future. When you recognize how stories shape your perception of the economy, you can start evaluating your decisions with more clarity and confidence. A grounded, data-driven approach can help you stay focused on long-term prosperity. With the help of a financial expert who understands both the data and the psychology at play, you can make decisions that support your long-term goals rather than your momentary fears and build a financial path to thrive.