The way we misjudge probabilities is explored by Massimo Piattelli-Palmarini in his excellent Inevitable Illusions - How Mistakes of Reason Rule Our Mind. He describes a study that Tversky and Kahneman, two cognitive psychologists, carried out in the middle of the Polish crisis in the early 1980s. They asked various political leaders and generals to evaluate the probability that the USA would withdraw its ambassador from the Soviet Union. They then asked the same people to evaluate the probability that both (a) The USSR would invade Poland AND (b) as a consequence, the USA would withdraw its ambassador from the USSR.

The generals said the second scenario was more likely than the first. If you think about it, that's nonsensical: the second scenario is a subset of the first scenario. The probability of the USSR invading Poland AND the USA withdrawing its ambassador is less likely than just the USA withdrawing its ambassador. But the generals' brains didn't spot that, and neither would yours. They heard the story, and found it more convincing than the statement.

Stories are powerful, persuasive and ever more fashionable tools. They're a great way to put across your point of view. Telling a story is often a better way to convince others than presenting dry facts, logic and analysis. If you're trying to raise capital from VCs, then you should tell a story. If you're trying to convince your boss that your new strategy will succeed, then tell a story. If you want to persuade potential customers to buy the software that you're selling, then tell them a story.

But if you're listening rather than telling then be careful. Stories can be dangerous. It's easy to construct a story - intentionally or otherwise - that buries the facts and misleads an audience.