We all love stories. They help us make sense of the world, connect with others, and find meaning in our lives. But stories can also be dangerous, especially when they influence our financial decisions.

In this post, I will share some of the ways stories can affect our money-related behaviors, and how we can protect ourselves from the financial risks of the stories we love.

The Power and Peril of Stories

Stories are not just entertainment. They are powerful tools that can shape our emotions, beliefs, and actions. As Nobel Prize winning economist Daniel Kahneman said, “No one ever made a decision because of a number. They need a story.”

Some stories, however, are more effective than others – and there can be significant financial risks to the stories we love most.

For example, think of the recent craze over cryptocurrencies, NFTs, and meme stocks. Many people invested in these assets not because of their intrinsic value or performance, but because of the stories they told. Stories of revolutionizing the world, disrupting the status quo, and getting rich quick. Stories of being part of a community, a movement, a game.

These stories appealed to our emotions, our desires, and our identities. They made us feel excited, hopeful, and brave. They also made us ignore the facts, the risks, and the alternatives.

But as we have seen, these stories can quickly turn into nightmares. When the market crashes, the hype fades, and the reality sets in, many people are left with huge losses, regrets, and debts.

This is not a new phenomenon. History is full of examples of financial bubbles and busts driven by stories. From the tulip mania in the 17th century to the dot-com bubble in the 20th century, stories have lured people into making irrational and costly decisions.

Why are we so susceptible to stories? And how can we avoid falling for them?

How Stories Work on Us

Stories work on us in two ways: they reach out to us, and we reach out to them.

First, stories reach out to us by activating our brains and our hormones. Research shows that emotionally engaging stories can stimulate the release of oxytocin, a hormone that makes us more empathetic, trusting, and generous. This can make us more receptive to the messages and the motives of the storytellers, whether they are politicians, marketers, or con artists.

Second, we reach out to stories by filling in the gaps and creating meaning. We are wired to seek explanations, patterns, and coherence in the world. When we encounter something that doesn’t make sense, we want to find the missing link. Stories provide us with that link, even if it is not true or logical.

As writer Maria Konnikova writes in her book, The Confidence Game, “We crave stories, and when there aren’t ready ones available, we create them… A confidence artist is only too happy to comply—and the well-crafted narrative is his absolute forte.”

How to Resist Stories

If stories are so powerful and pervasive, how can we resist their influence and make better financial decisions?

Here are some tips that I have found helpful:

• Accept that you are not immune. No matter how smart, successful, or experienced you are, you can still fall for a good story. Don’t let your pride or ego blind you to the possibility that you might be wrong or misled. Be humble and open-minded.
• Think like a scientist. Don’t just accept a story at face value. Test it, challenge it, and look for evidence. Ask yourself: What are the facts? What are the assumptions? What are the alternatives? Seek out different perspectives and opinions that can help you see the bigger picture.
• Think like a literary professor. Don’t just react to a story emotionally. Analyze it, critique it, and understand it. Ask yourself: How does this story make me feel? Why does it make me feel that way? What is the purpose and the message of this story? Who is telling it and why?
• Write your own story. Don’t let other people’s stories define your identity, your values, or your goals. Write your own story based on what matters to you, what you know, and what you want. Be the author of your own life.

Conclusion

Stories are not bad. They are essential for our survival and well-being. But they can also be dangerous, especially when they affect our financial decisions.

We need to be aware of the power and the peril of stories, and how they can work on us and against us.

We need to be careful about the stories we consume, and the stories we create.

We need to be smart about the stories we use, and the stories we choose.