There is a very human problem buried in the idea of smart investing: we like to believe that we make decisions with clear eyes, based on numbers, facts, and rational judgment. But the trouble with a half-decent investing story is that it can survive the truth. It can live on in our minds long after we have been told, quite explicitly, that it was never real. That lingering impression can cost real money. In a working paper called Learning from False Stories, behavioural economists at the University of Cologne and the University of Bonn tested just how powerful this effect can be. They showed participants an AI-generated video of former Federal Reserve chair Jerome Powell warning about a major banking crisis. Then they told the participants the video was a deepfake, that Powell never said any of it, and that the video had no bearing on their investment decisions. It should have been easy to ignore. Yet the people who watched the fake video subsequently invested less money in JPMorgan. They knew the video was fake. But they acted as if some part of the scary story might still be true. That is the strange, uncomfortable magic of narrative: a story gets inside us, and being told it is false is not the same as having never heard it at all.
It would be easy to dismiss that finding as a fluke, so the researchers devised another experiment to find out whether the effect was real. Imagine you own Company A. You are told that an analyst has raised its price target. Naturally, you become more positive about Company A. Then comes the correction: sorry, the analyst was actually talking about Company B. You should return to your original view of Company A. When the information is made up of dry numbers, that is more or less what happens. People can adjust. They can walk back their enthusiasm. The calculation was wrong, and so they redo the calculation. But then the researchers repeated the experiment with a different kind of information. This time, instead of a price target, they told participants a story about Company A’s apparently exceptional management. The executives were visionary and disciplined, the story went. They thought long-term. They had created a strong corporate culture. Participants felt more positive about Company A. Then came the same correction: sorry, that story was actually about Company B. The correction did not fully work. People continued viewing Company A more favourably, even though they knew the story had been exposed as irrelevant. A number can be corrected, but a story makes us imagine something. Once we have pictured a competent management team, or a banking crisis, or perhaps a trillion-dollar future for a company colonising Mars, we cannot quite unsee it. The factual claim can be removed, but the impression remains, leaving what the researchers call a “qualitative residue.”
Why should a story be so sticky, even when we know it is false? The answer has to do with how human beings process information. Numbers are abstract. They sit in the brain like symbols, waiting to be used in a calculation. A story, by contrast, invites us into a scene. It creates images, characters, emotions, and a sense of momentum. When you hear about a visionary management team, you do not simply store the fact that executives are good at their jobs. You begin to imagine what it would be like to be led by people like that. You see confidence, discipline, and long-term thinking. You feel the safety that comes from being in capable hands. You might even get a little excited. And once that mental picture has been formed, it has a kind of emotional reality. The correction tells you the story was not about Company A, but it does not tell your imagination to go back in time and undo the pictures it created. This is why a rumour can damage a person’s reputation even after it is fully debunked, and why a beautiful lie can stay lodged in the mind long after the truth arrives. We are storytelling animals. Our brains are wired to remember narratives, not excel spreadsheets. And so a story that has taken root in the imagination is not truly erased by a retraction. It merely becomes a ghost, still floating in the background, still shaping how we feel.
This is not just an academic curiosity. Markets are awash in stories, and the rise of AI-generated deepfakes makes the problem more urgent than ever. Fund managers tell stories about moonshots, disruption, and the brilliant founders who are going to change the world. Analysts make their arguments through narratives as much as through valuation models. A single sensational video, even a fake one, can move sentiment in ways that traditional corrections cannot catch up with. Investors can be told a hundred times that the CEO never said what the video shows. They can know with complete certainty that the footage is false. And yet, on some level, the story still does its work. The fear feels real. The excitement feels real. The image of a bank with its foundations cracking, or a company racing toward a glorious future, lingers and nudges our decisions. We tell ourselves we do not believe it, but our hands still move the cursor. The problem is not only the malicious deepfakes and deliberate lies. It is also the everyday storytelling that fills financial media, the rumours passed on in chat rooms, the hype surrounding an industry, the heroic origin story of a startup. Ultimately, the story is a scale in our minds. It weights our judgement even after it has been exposed as fiction.
So what can we do about this? The study suggests that simply being aware of the problem is not enough. If a story leaves a qualitative residue, then knowing about the residue is not the same as wiping it away. We cannot just tell ourselves, “I know that was false, therefore I will ignore it.” That is not how our minds work. What we can do is build systems and habits that do not rely on our ability to forget what we have heard. We can make decisions in advance, before the story arrives, so that a dramatic narrative cannot easily push us off course. We can ask ourselves what hard, verifiable fact the story is attached to. If you remove the story, what evidence remains? If the answer is almost nothing, then the trade is probably a fantasy. We can also slow down. A story is quick and emotional; numbers are slow and dry. When the story feels good, or feels scary, we can force ourselves to write down the actual facts, not the colourful details. We can ask a friend to play the correction, to remind us that the analyst was talking about Company B, not Company A. Most importantly, we can learn to recognise when we are inside a narrative rather than simply observing one. The story is not the problem. The problem is mistaking it for evidence.
In the end, we will never live without stories. We are wired to love them, and they are often how we make sense of the world. There is no point in pretending we can become perfectly rational machines, immune to a well-told tale. The better approach is honesty. We can admit that a great story moves us, even when we know it is not true. We can accept that the residue will remain, and then make allowances for it. We can hold the story a little more lightly, with a little less certainty, and leave a little more room for doubt. The researchers do not say we are fools. They say we are human. The half-decent investing story can survive the truth; that is what makes it half-decent. But if we know that about ourselves, we can stop pretending otherwise. We can build checks and balances, listen to critics, rely on data, and still appreciate the narrative for what it is. The trouble is not that a story can linger. The trouble is when we let it decide, all on its own, what our money should do.