Detection of deception in financial industry

We would all be interested in becoming better at detecting lies, wouldn’t we? There should be a lot of money to be made if we were able to single out those misleading and lying corporate executives. However, it is not such an easy task, although we all do tend to believe (deep down inside) that we are good at it, and that our own sixth sense is better than everybody else’s.

This is the first post to start what I hope will prove an interesting discussion of the developments in the science of personal credibility assessment and the relevance of these for the financial industry. (Mainly investments, as I am a fund manger myself.) Deception detection for application in finance is undoubtedly a very promising and exciting field.  Having such skills could be of immense value to the profession, as suggested by Institutional Investor Journal already back in 2013.

When it comes to investment professionals the belief of being in possession of a superior intuition in matters of lie detection is widely held. We (I will use we, since I am part of the profession) do call it gut, or experience, or think that we are able to observe something everybody else is missing. With one more twist though! we do tend to have elevated confidence in our ability to do so. This has been shown in a study commissioned by  CFA where researchers have looked at the ability of CFA society’s members to detect lies.

Surprisingly for the investment community, but not surprising to the deception detection experts, the study shows that the finance professionals are just as bad at detecting lies as any other man on the street. Flipping a coin would be just as accurate. As financial analysts or fund managers, we often tend to think that we excel at making sense of large amounts of information and believe ourselves capable of seeing patterns ahead of others. However, it is rarely the case. Overconfidence in own abilities is often discussed as a persistent behavioural bias in the field of finance.

What can we do to actually help build confidence in our judgements of a person’s credibility, without relying on our fuzzy gut feeling or whatever else we think we know  about typical liars? What can we do to improve our ability to decipher corporate communications and management intentions?

First of all, we need to debunk the myths. The same study showed that most investment professionals believed that relying on body language clues is more helpful in getting a better read on who is lying than relying on e.g. language based clues. Let’s bust some myths right now and right here.

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