It is not easy for potential investors to make decisions about where exactly to invest their savings. The market for investment instruments is immense. Many, therefore, seek advice. But should investors trust advisors who have their own private interests? Such advisors may try to steer investors in a particular direction by constructing a compelling narrative about a particular investment opportunity. In a recent study, WZB researchers Kai Barron and Tilman Fries explore how such narrative persuasion works.
Modern life offers nearly unbridled access to information; it is the harnessing of this information to guide decision-making that presents a challenge. But can an individual try to shape the way another person interprets objective information by proposing a causal explanation (or narrative) that makes sense of this objective information? Using an experiment, Kai Barron and Tilman Fries have examined the use of narratives as a persuasive tool in the context of financial advice where advisors may hold incentives that differ from those of the individuals they are advising.
The authors first show that advisors construct self-interested narratives and make them persuasive by tailoring them to fit the objective information. Second, they demonstrate that advisors can shift investors’ beliefs about a company’s future performance. Third, they identify the types of narratives that investors find convincing, namely those that fit the objective information well. Finally, the researchers evaluate the efficacy of several potential policy interventions aimed at protecting investors. The researchers conclude that narrative persuasion is difficult to protect against. This suggests that investors should be aware of the effectiveness of narratives as a persuasive device and exercise caution when accepting advice from an advisor who may have a conflict of interest.