From Data to Conviction: Narrative Stabilization and Inference under Uncertainty in Investment Decision-Making

This working paper examines investment decision-making in lower mid-market M&A as a process of inference under conditions of fundamental uncertainty. It argues that “investment conviction” is better understood as the stabilization of a coherent causal narrative rather than the outcome of purely objective evaluation. Available data constrains a space of plausible interpretations but does not determine a single warranted conclusion. Drawing on predictive processing and research on narrative cognition, the paper develops the concept of narrative stabilization as the mechanism through which decision-makers converge on an actionable interpretation. Valuation is reinterpreted as a formalization and coordination device embedded within this broader inferential process. The paper also analyzes how outcome realization reshapes the evaluation of decisions through retrospective narrative reconstruction, contributing to systematic distortions in perceived decision quality.