Glossarytaught in M6.04, M6.03
Narrative fallacy
Also called story bias.
Preferring an explanation with a story over one with a distribution, and treating a coherent account of the past as evidence about the future.
Markets generate narratives continuously, and the most compelling ones attach to the most extreme outcomes, because those are the ones that demand explanation.
Its corrective is quantitative and unglamorous: what is the base rate, what does the distribution look like, and how many companies with this story failed?
Treat a good story as a hypothesis. It doesn't count as evidence.