In another life, I employed a quantitative/qualitative screen or measurement tool to assess where potential frauds or misrepresentations were taking place.... in order to avoid poor purchased and/or find potential short candidates. I wonder if the lie detection research mentioned below can be married effectively with it.
Bernie Ebbers, Jeff
Skilling, Bernie Madoff. How different would life be for investors if
these fraudsters and others had been smoked out before they did their
damage?
Lie detection is at the crux of psychology and criminal
justice. Much has been written about the body language, the subconscious
expression and the linguistic signifiers of deception. In terms of
investment, stopping fraud could save billions, as any investor in
Enron, WorldCom or Madoff Investment Securities could attest.
Financial
professionals’ widespread agreement on the need to stop such fraud in
its tracks was the inspiration for an intensive study commissioned by
Jason Voss, the content director of Charlottesville,
Virginia–headquartered CFA Institute, a global organization of
professionals working in the investment industry. Voss, a former
portfolio manager of the Davis Appreciation & Income Fund, hopes
ultimately to create a product or training program to help equity
analysts develop perceptiveness with regards to potential dishonesty on
the part of high-ranking corporate executives. Of the training
initiatives offered by the CFA Institute, this one has garnered the most
positive response, with 91 percent of members showing interest.
To
develop a lie detection process geared specifically for the financial
world, the CFA Institute has enlisted Maria Hartwig, a social
psychologist who specializes in the study of lying, lie detection,
interviewing and interrogation. In a workshop offered by the institute
on October 24, Hartwig, an associate professor at the John Jay College
of Criminal Justice, part of the City University of New York, pointed
out that most people assume that liars provide clear, distinguishable
signals such as fidgeting, gaze aversion and implausible statements. But
a synthesis of the scientific literature on deception has shown this
not to be the case. People are unable to root out deception slightly
more than half of the time, as suggested by 50 years of scientific
research on the topic. “People believe in the fiction of Pinocchio,”
Hartwig asserts. Hartwig and Voss say this will be the first scientific
research study on deception in the financial industry.
Research
in the science of deception has focused primarily on the criminal
justice system. The research and the direction for this study will thus
require a different approach, notes Voss. “You can’t waterboard a CFO,”
he says.
As part of their offerings in partnership with the CFA
Institute, Hartwig, Voss and John Jay colleague D. Brian Wallace
co-wrote a paper titled “Detecting Lies in the Financial Industry: A
Survey of Investment Professionals’ Beliefs,” which is to be published
in an upcoming edition of the
Journal of Behavioral Finance. The
survey, which was conducted online with 607 CFA Institute members across
76 countries, yielded results similar to those that surfaced in volumes
of nonfinancial studies. Participants believe they can detect lies with
about 66 percent accuracy, engendering widespread, incorrect
stereotypes about deceptive behavior.
The CFA project presented
another challenge for Hartwig, whose goal is to train people to act
against their natural inclinations and long-held beliefs. She has
retrained military interrogators to improve their lie detection skills.
Despite being professionals in the field, these interrogators showed a
worse than average record than the general population in recognizing a
lie, with a mere 43 percent hit rate. After working with Hartwig, they
improved their lie detection rate to 66 percent.
Not surprisingly,
some analysts have been skeptical. “I believe my ability to read a
CEO’s body language is a distant second to being a strong fundamental
analyst,” says
Howard Chen,
who covers brokerages, exchanges and trust banks for Credit Suisse.
While he agrees a new training program could be beneficial, Chen insists
that as an analyst his “primary job is providing solid bottoms-up
analysis and client service, which is largely agnostic of this.”
Of
course there is a difference between the needs of military police and
financial analysts. Voss and Hartwig hope to formulate a research-based
product based on how to be smarter, not fall prey to fallacies and be
better at asking the right questions. “What you have to do is interact
with liars and truth tellers” and learn how to intervene to provoke
different responses, Hartwig explains. Overall, the training may look a
bit like a chess game, with financial professionals learning to
anticipate their opponents’ moves and make better strategic moves
themselves. An expert player will learn how to ask questions in such a
way that the liar is trapped.
