Investors have an inherent need to make sense of the world around them, and for that they need stories. Stories that engage and explain. “The initial point I’d make is that our minds work very hard to make sure there’s a cause for every effect. If we see an outcome that we can’t explain, it’s like an itch that’s demanding to be scratched,” says Michael J Mauboussin, the chief investment strategist at Legg Mason Capital Management, the ninth-largest asset management firm in the world, with $703 billion under management as on September 30, 2009. (That is a little over four times the current size of the Indian mutual fund industry). OK, business news channels and newspapers try and fulfill this investor need for stories.
But are they really effective? No, if one is to believe Mauboussin. As he writes in his best selling book More Than You Know – Finding Financial Wisdom in Unconventional Places, “The press sounds a lot like a split-brain patient making up a cause for an effect, and we investors lap it up because the link satisfies a very basic need (of stories)… Read the morning paper explaining yesterday’s action for entertainment, not education.” Mauboussin’s latest book Think Twice – Harnessing the Power of Counterintuition is just out.