Narrative as a Sensemaking Heuristic: Evidence from Individual Investors and Their Brokers

Abstract

In this study, we discuss why and how narratives of market actors can be used as one of the means to study cognitive heuristics and biases in financial markets. Our approach comes from a position in human sciences that the narrative mode of knowing and explanation is the most salient mode of knowing and explanation among humans (Sarbin 1986, Bruner 1986, Polkinghorne, 1988, Tilly 1998, Akerlof and Shiller 2009). Our argument is two-fold. Firstly, we believe that market actors generally create meanings about market-related events and actions in a story mode. Secondly and partly related to the assumed prevalence of story mode in market actors’ cognition, we believe that some of the cognitive heuristics and biases will be socially, materially and historically embedded rather than universally latent in human mind. In the light of this discussion, we explain the theoretical and methodological contours of what can be called a narrative approach to studying cognition in financial market. In the final section, we demonstrate an application of this approach in the case of individual investors and their brokers at the Istanbul Stock Exchange (ISE). We find that the narratives from a sample of brokers serving individual investors at the ISE contained a shared frame that conceptualised the ISE as a globalized equity market. This frame was observed to act as an anchor (a la Tversky and Kahneman, 1974). Consequently, the observed brokers frequently based their interpretations and predictions about the ISE's price movements on the macro and micro news and data flows from a select developed and developing equity markets in the world. The historical origins and institutional dynamics of this anchor is briefly discussed and the study concludes with a note on how econometric studies on the ISE's co-movements with developed and developing markets can benefit from sociological insights.