Narrative Expectations in Financial Forecasting

Conviction Narrative Theory (CNT) is a theory of choice under radical uncertainty—situations where outcomes cannot be enumerated and probabilities cannot be assigned. Whereas most theories of choice assume that people rely on (potentially biased) probabilistic judgments, such theories cannot account for adaptive decision-making when probabilities cannot be assigned. CNT proposes that people use narratives—structured representations of causal, temporal, analogical, and valence relationships—rather than probabilities, as the currency of thought that unifies our sense-making and decision-making faculties. According to CNT, narratives arise from the interplay between individual cognition and the social environment, with reasoners adopting a narrative that feels ‘right’ to explain the available data; using that narrative to imagine plausible futures; and affectively evaluating those imagined futures to make a choice. Evidence from many areas of the cognitive, behavioral, and social sciences supports this basic model, including lab experiments, interview studies, and econometric analyses. We propose 12 principles to explain how the mental representations (narratives) interact with four inter-related processes (explanation, simulation, affective evaluation, communication), examining the theoretical and empirical basis for each. We conclude by discussing how CNT can provide a common vocabulary for researchers studying everyday choices across areas of the decision sciences.

Section: Analogical Structure: Pattern Detection and Extrapolationmentioning

confidence: 98%

Conviction Narrative Theory: A theory of choice under radical uncertainty

Johnson

Bilovich²,

Tuckett

2022

Section: Analogical Structure: Pattern Detection and Extrapolationmentioning

confidence: 98%

Narratives need not end well; nor say it all

Andreetta¹,

Spalla²,

Treves³

2023

To fully embrace situations of radical uncertainty, we argue that the theory should abandon the requirements that narratives, in general, must lead to affective evaluation, and that they have to explain (and potentially simulate) all or even the bulk of the current decisional context. Evidence from studies of incidental learning show that narrative schemata can bias decisions while remaining fragmentary, insufficient for prediction, and devoid of utility values.

Section: Analogical Structure: Pattern Detection and Extrapolationmentioning

confidence: 98%

Narratives of crisis: From affective structures to adaptive functions

Pelletier¹,

Mclaughlin²,

Boespflug³

2023

This commentary focuses on affective structures and the main adaptive functions of shared narratives to fill the gaps of the Conviction Narrative Theory. The transmission of narratives among individuals in highly uncertain situations is irrevocably tainted by affects and anchored in collective memory. Narratives have important evolutionary functions for human beings under threat and act as the social glue that creates and strengthens social bonds among individuals.