How stories drive financial behaviour—and what to do about it
Reaching financial prosperity can start by becoming the hero of your own financial narrative.
Six months ago, I had never heard the term “double-bottom.” Now, after seeing an Internet meme predicting such an event—a phenomenon in which a stock or index hits an extreme low a second time (resembling the two bottom points in the letter “W”)—I’m half-expecting to see my retirement savings shrink back to March levels, or worse.
I know better than to make rash decisions with my long-term investments based on an unsolicited infographic, but even experts have to be on guard against the persuasive power of a simple, emotionally charged story.
Why can stories be so powerful? Because stories drive financial behaviour. The specific stories we decide to believe and internalise will play an influential role in shaping our future decisions—for better or worse. Whether an investor is going to put their money into cash or wildly speculative investments, they are doing so based on a story in their mind.
Investors may avoid these rash financial behaviours by recognising the underlying stories behind them.
Where our stories are essential—and where they're dangerous
It’s a basic function of the human psyche to make sense of our lives through story. We’re constantly exposed to thousands of stimuli through our physical senses and thoughts and filtering out what we perceive to be noise helps focus our attention on what we deem important.
From this pared-down set of filtered stimuli, we then weave a meaningful narrative into a story of what happened in that moment.
But in addition to stories that help make sense of our personal experiences, we are also exposed to other people’s stories on a daily basis. Cultural, political, and social narratives fill the airwaves. Memes, jokes, soundbites, and slogans slide along every media feed. All of these stories add to the stimuli we are already trying to sift through.
How stories drive financial behaviour
Each specific financial move a person decides to make is a strategy, or an attempt, to meet their goals. That strategy is based on an underlying story that they believe about the factors in play. If you disagree with their methods, you can argue yourself hoarse about the strategy itself, but if you don’t deal directly with the underlying story that informed their strategy, you will not move them.
For example, let’s say an investor wants to cash out during a market downturn. At that moment, the story they are telling themselves may be depending on recency bias—our tendency to overweigh recent occurrences when making decisions. Thus, when an investor sees the market plunge, they believe it will continue to do so and think they need to cut their losses now. In this case, cashing out is only a strategy, while the belief that the market will not recover is the crux of the problem.
It’s important to differentiate between the strategy and the underlying story that informed that strategy. That’s because to persuade a person to change their strategy, you need to start with the story they already believe.
How to start understanding people's stories
Getting clarity about the stories investors believe about money can be challenging, in part because many people are unaware that there even are storylines running through their reasoning. We tend to take our own views as fact rather than perspective, so simply asking a client to tell you what stories they’re using isn’t realistic.
The following questions can help you unlock internalised stories:
- Can you describe your financial life up to this point? Beginning in childhood, what have been the major financial events that you think have shaped your life the most?
- When you think about difficult financial times in the past, how well have you “bounced back,” financially and/or emotionally?
These questions can help you tease out stories. They also make for great conversations that can help you identify goals, hopes, or fears that might otherwise not have been apparent.
That said, there are some stories that contribute to well-being and resilience, and others that increase stress and erode well-being. By learning to recognise these two types of storylines, investors can help direct their mental stories toward the healthier type—gaining a better chance of resilience regardless of how events play out.
Better stories; better strategies
Research suggests that how we tell our personal story can make a big difference, not only in our overall well-being, but also in our ability to be resilient after setbacks or trauma.
Dan McAdams is a professor of psychology at Northwestern University who specialises in narrative psychology. He says that personal stories can be grouped into one of two categories: Contamination stories and Redemption stories.
- Contamination stories have the following narrative arc: “I was going along just fine, then BIG UGLY THING HAPPENED, and it contaminated my life. Now things are not what they could have been as a result.”
- Redemption stories have the same beginning and middle, but the end is different. Redemptive stories sound like: “I was going along just fine, then BIG UGLY THING HAPPENED, and it forced me to grow and evolve. Now, I’m a better person and my experience adds to my uniquely valuable perspective.”
In our personal lives, the redemptive narrative style can have long-lasting, positive effects. Several studies of people who have faced traumatic events have found a positive link between the redemptive storytelling style and greater well-being later in life (measured in terms of positive emotions, life satisfaction, and personal resilience after setbacks). Researchers have even found positive health effects.
For instance, I once met a man who owns a wildly popular curiosity shop in the Midwest. He told me that even though he is currently living his dream, it wasn’t always this way. In the 2008 global financial crisis, he lost everything. “I mean everything,” he said, “Even my relationship with my son.”
After the devastation, however, he reassessed his priorities and life goals, and embarked on the path that led him back to financial prosperity, but with a deeper happiness and satisfaction than he had before. I’ve never met a person who spoke more fondly of their personal financial losses. His story is a redemptive tale that spins crisis into opportunity, and he comes out on top in the end.
When thinking about your financial life stories, listen carefully for themes of contamination versus redemption. Are you the hero at the end, or the victim? This makes a big difference in how you will approach similar situations in the future.
Editing client stories
Until you make the unconscious conscious, it will direct your life and you will call it Fate.
Carl Jung
Once we are conscious of the stories we’re working with, then we can question, challenge, and, if necessary, rewrite them. When you recognise a contamination storytelling style, you can help revise your story to a redemptive style. Here are a couple of tricks I’ve personally used to help turn some very BIG UGLY THINGS into cherished memories of positive turning points.
- Imagine a time traveller (alien, angel, or other) appeared to you and told you that this exact financial situation becomes one of your proudest transformative moments. How would you imagine that plays out?
- If you knew this moment was the opportunity to make one major change to your financial life, what change would you make?
Stories will always be with us
Whether it’s covid-19, Bitcoin, economic boom, or collapse, there will always be stories surrounding us, vying for our attention. Internally, no matter what we experience, we will translate it into a meaningful story arc. We can’t avoid these stories; they are everywhere. What we can control is the stories we choose to adopt and internalise, and the narrative style we use to tell them.
Choosing to rely on stories of redemption, positive transformation, and making meaning from chaos is an effective way to protect ourselves from the physical, psychological, and financial effects of stress and uncertainty.
Listen critically to the stories you are telling yourself. Listen critically to the stories you hear from others. Then, challenge those contamination stories and become the hero of a redemption tale instead.