The theory of narrative identity postulates that individuals form an identity by integrating their life experiences into an internalized, evolving story of the self that provides the individual with a sense of unity and purpose in life. This life narrative integrates one's reconstructed past, perceived present, and imagined future. Furthermore, this narrative is a story – it has characters, episodes, imagery, a setting, plots, and themes and often follows the traditional model of a story, having a beginning (initiating event), middle (an attempt and a consequence), and an end (denouement). Narrative identity is the focus of interdisciplinary research, with deep roots in psychology.

In recent decades, a proliferation of psychological research on narrative identity has provided a strong empirical basis for the construct, cutting across the field, including personality psychology, social psychology, developmental and life-span psychology, cognitive psychology, cultural psychology, and clinical and counseling psychology.

Development of narrative identity in childhood is largely influenced by opportunities for narrative expression through conversations with caregivers and friends. Young children whose parents share more detailed personal narratives from their own lives tend to have more detailed and coherent personal narratives themselves by the end of the preschool age period. In addition, young children whose parents or caregivers engage in more elaborative reminiscing techniques with them (such as asking open-ended questions or including emotional information) when co-constructing stories about past events tend to tell more coherent stories in both childhood and adolescence. Talking to attentive listeners is also important to childhood development of narrative identity as speakers provide more accurate autobiographical information when speaking to attentive listeners as opposed to distracted listeners, therefore developing more specific autobiographical memories which give rise to richer personal narratives.

The capability to independently construct narratives for a life story framework and form an identity emerges in adolescence. This aligns with Erikson's stages of psychosocial development, which posits that the central developmental task during adolescence is to establish an individual identity. The development of life story narratives in adolescence is facilitated by co-constructed reminiscing, in which caregivers use discussion, comparison, and analysis of inner motivation to guide reflection about past events and create narratives that explain situations and behavior. This helps adolescents develop an understanding of the relationship between the "self" of the past and their personal narrative in the present This is achieved through autobiographical reasoning which uses (auto-)biographical arguments to relate distant parts of life to each other and to the development of the narrator's self, thereby contributing to life narrative coherence. Establishing a life story plays a vital role in adulthood by supporting generativity, and it helps to foster meaning-making at the end of life.

Entire life narratives and single event stories tend to increase in coherence and meaning-making over the course of adolescence. When a child, especially a boy, makes stronger semantic connections in early adolescence, he has a worse sense of well-being, but as he moves to late adolescence his well-being increases. The large jump in cognitive learning during adolescence allows this change to take place. Since this is a very important time for children to expand their social groups and conversational constructs, more semantic narratives can be created and allow the meaning making construct to develop.

A person's narrative identity is a layer of personality related to, but distinct from the broad dispositional traits (The Big Five) and contextualized characteristic adaptations, described in Dan P. McAdams's three-level framework. Dispositional traits, drawn from the Five-Factor Model of personality are broad, decontextualized descriptors that are relatively stable across the lifespan and are useful for drawing comparisons between individuals. Characteristic adaptations encompass a person's motivations, developmental concerns, and life strategies and are used to describe the individual within their contextualized time, place, and social roles. Narrative identity, the third level in McAdams' framework, encompasses the internalized, evolving story of the self. It is argued that assessing all three levels simultaneously gives you a personological description of the whole person.

Different ways of interpreting and narrating life changes correlate with different forms of personality development. Because of the close linkage between narrative identity and psychological well-being, a common research focus in narrative identity is in exploring the relationship between characteristics of narratives and how they relate to personality development in the domains of ego development and psychological well-being. Individuals who place a high importance on understanding new viewpoints show higher scores in ego development, and those that placed importance on interpersonal relationships, joy and societal contribution tend to have higher scores on well-being.

Narrative can be approached through one of two epistemological paradigms: hermeneutic (also called "narrative"), or paradigmatic. The hermeneutic approach seeks to capture the specific, personal, and highly contextualized elements of an individual's story. The paradigmatic approach, on the other hand, tries to classify narratives, determine associations, draw cause-and-effect relationships, and test and validate hypotheses - to transcend the particulars that the hermeneutic approach primarily concerned with, to generate generalizable scientific findings.