Narrative fallacy

Reading a sequence of events as a coherent story with clear causes, when a large part of what happened was chance.

Example

Reading an old entry after checking what happened: a line that was genuinely balanced at the time now reads as either prescient or foolish, depending only on the ending.

Important

The problem is not that a story gets told but that the ending is known first, and the distortion is invisible from the inside - so the defence is the order you read in, not the scepticism you bring to the reading.

Related terms

  • Hindsight bias — The tendency, once an outcome is known, to recall having expected it - the genuinely uncertain version of events quietly stops being available.
  • Outcome bias — Judging the quality of a decision by how it turned out, when the result was produced by the reasoning and by chance in proportions you cannot observe.
  • Survivorship bias — Drawing conclusions from the examples that lasted long enough to be visible, while the ones that failed have quietly left the sample.

Lessons that explain it

  • Spend the first meeting listening for what is specific — A first meeting is for finding out whether the opportunity fits your thesis and whether the founder's claims are specific enough to check. Structure it, ask for facts, and leave with a clear next step. (11 min)
  • The most important line in an update is often the one that is missing — Founders naturally lead with good news. Reading an update well means comparing it with last period, noticing which figures disappeared and separating real warning signs from normal early-stage noise. (11 min)
  • One percent of a huge number is not a market size — Top-down market sizing starts with a large industry figure and assumes a share. Bottom-up sizing counts real customers and prices. Only the second tells you anything reliable. (12 min)
  • The pitch is designed to persuade you; the business has to persuade customers — A compelling pitch and a strong business are different things. Separate the story from the evidence, look for what is missing, and test claims before they shape your judgement. (10 min)
  • Reading an old entry without rewriting it — The entry is only half the practice. The other half is going back to it later and reading what you actually wrote, rather than what you now wish you had. (11 min)

All 578 terms in the Investing glossary