Human decision-making is often based on compelling stories, but eventually, people trust their own eyes and recognize the truth. Therefore, investors should question and challenge any prevailing market narrative before acting on it. Stories are a crucial part of our lives, and according to the neurological theory of narrative thought, they help us make sense of the world.
The theory of the narrative paradigm shows that stories are more persuasive and memorable than logical arguments and facts. The power of narratives can lead to almost contagion effects, which move markets and drive the business cycle. In financial markets, behaviour is driven by expectations of future returns, which are often driven by narratives, particularly during times of heightened uncertainty. Current narratives driving financial markets include technology and the secular stagnation narrative. Investors need to evaluate which narrative will become the dominant one driving behaviour and markets.
Several narratives have become highly contagious, and many of them are new variations of old ones. One such example is the fear that technology is taking over our lives, which is essentially an updated version of the narrative about technological unemployment that has been a cause for concern since the Industrial Revolution. we saw this clearly with the recent attack on AI systems such as ChatGPT. This fear has always centered around machines replacing human labor and producing an excess of output. However, with the rise of automation, artificial intelligence, and machine learning, the narrative has shifted to computers substituting the human brain, creating a growing fear of irrelevance among individuals.
While these concerns may impact individuals on a personal level, they can also have broader economic implications by reducing confidence in consumption, investment, and entrepreneurship. It is important to note that multiple narratives can coexist and either reinforce or undermine one another. As investors, it is crucial to assess which narrative is likely to become dominant and drive behaviour and ultimately affect the markets.
For instance, the technology narrative is reinforced by the secular stagnation narrative, which suggests that growth and inflation will return and remain low because of an increasing tendency to save and a declining desire to invest in developed economies. This narrative is powerful because it is grounded in our recent experiences. However, there is also a counternarrative that suggests that the same technology that has been causing concerns could lead to a fourth industrial revolution, supporting strong growth and earnings and justifying higher market valuations.
My tendency is to believe the latter. The early waves of the 4th industrial revelation are already crashing on the shore, and it is up to all of us in business and investors to decide if we learn how to surf or try to hold back the sea. To achieve success in this new age of technological globalisation is to embrace the devolution of power and influence; as more players enter the field they bring novel opportunities for meaningful growth. Consider the Ukrainians continuing to deliver professional services from the underground carpark whilst bombs land overhead or the Malawian pigeon pea farmer boosting crop production through market intelligence.
The Technological factor has driven the economy for decades and is unlikely to stop now.
The narratives we tell ourselves matter, be sure to distinguish between fact and fiction.