Behavioral finance FAQ / Glossary (Deception)

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Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
i: incidental

Deception (in financial markets)



See manipulation, pump and
dump, disinformation, signal,

cognitive bias, emotion,
framing, moral, ethics

Caveat emptor (buyer, beware!),

Caveat investor, caveat your pockets!

Definition:

financial deception / scam / fraud is
the
attractive but false presentation of financial assets,
operations  or schemes that can only ruin the investors
who believe it, with the aim by the scam artist to
pocket their savings.

Beware of miraculous appearances and highly sexy
looks!
They might be just shams designed to grab
your money.

How frequent in modern asset markets?

Are they Kingdoms of  truth and fairness?

Are their watchdogs, with their ultra sensitive nose
andstate of the art radars, really smelling
and watching that everything is OK ?

Do delinquents end up always in Court?

Deceptions and frauds are supposed to be rare events in modern asset
markets and financial institutions.

Those money playgrounds are assumed to be mature, well regulated and
well monitored.

But, as any human institution, they work via human beings.

And among Earthlings, perverse intentions are far from being absent

Whatever the rules (*) and controls, when money
is at stake, the temptation to fraud stays high.


Small financial scams occur nearly routinely
and huge ones occasionally.

(*) Some regulations have even perverse effects (see that phrase)

For example the capital adequacy ratio incited banks to "securitize" the
subprime loans (see below) so that they do not appear in their balance
sheet.

A well known recent example

No need to go back to the Jacob vs. Esau lentil stew scam.

A massive example was the 2007-2009 US "subprime loan crisis"
via credit-related "structured investment vehicles" and credit derivatives.

Contagious greed and immorality were certainly crucial motivators, but the
temptation could have originated from:

A massive money creation due to a lax monetary and credit policy by
   US monetary authorities.

Combined with illusive regulations (as mentioned above) and the
   neglect to monitor
fast evolutions in financial techniques and
   practices, to detect
those that are inopportune and/or fraudulent.

Such practices, often obscure in their sophistication and helped by cheap
money and general over-leverage, created moral hazards (see that
phrase).
They triggered a global financial crisis, akin to the burst of a systemic
pyramidal scheme, with perfumes of financial scams in the air.

Whodunit? .

- Watson, financial deceptions might be on the making, you said?
   Got any clues?

- Not at the moment, Sherlock. But I heard a few rumors in the
  club.

- That is why I keep my money in my socks and my socks buried in
   the garden.

- Not the best idea, Watson, financial dogs can dig! Better look for
   paw prints on
the teacup!

- Certainly, Sherlock, but what other clues to look after?

- Means, motives, opportunities as said in TV series.

See below the who, why, how and when of those purported misconducts!

1)   Who are the felons? Among which populations to enquire?

Here, even if this is discriminatory if not paranoid, but it can also be called
common sense, we have to have a look at people

Who might find the most interest to deceive investors,

More important, who have the practical possibilities to do it.

Those potential opportunists can be found among:

1) Top executives of listed firms,

2 Also their accountants / auditors / rating agencies,

3) Market / finance professionals

(bankers, brokers, analysts, fund managers and other traders),


4) Large shareholders (big hands)

5) Financial (and other) media,

6) Even public institution officials,

directly or at least by turning a blind eye.

- Oh, Master Jedi, should we be suspicious of all those people?

- Skywalker, don't see the dark side of the investing force
   everywhere.

In normal times, only a minority dares cross the line.

But beware of them, you might fall for their baits!

And normal times are not all times.

- OK, Master, most people are angels most of the times, except

when under pressure or temptation.

But in such cases, as they know each other, what about formal
or
informal consensuses? This is not just a "minority" then!

- Are you talking about collusion? Skywalker, you have such a
   devious mind!

- Well, you can always read the "consensus" or "peer pressure"
   glossary article.

2) Why do they do it?

What their maneuvers aim at can be:

1) To raise or to lower investors' expectations .

It creates the hope that asset prices will rise,
so as to sell high, or fall, so as to buy cheap,

2) Or, for the same purpose, to sustain those expectations.

The trick is to by boost, or not to discourage (with means
explained below) the existing bullish or bearish trends.

3) Or to hide financial problems.

When people are desperate, or just greedy, they might be
temptedto disguise the truth or to play funny games.

- Sheriff, keep an eye on would-be opportunists, some do their
  tricks in your back!

- Yes, Superintendent, even if I understand people who have
   nothing to lose!

3) How do they do it?

Mankind has invented endless ways to deceive,
manipulate and play
confidence tricks. For example:

1) Lying, plainly.
    Or more elaborately, building a good story that looks like a truth.

2) Hiding the truth (lying by omitting some crucial points), or at
     least bending it.


3) Building mirages, baits and false

impressions to direct people towards the wrong path.

Showing a red herring, blowing smoke screens.

A conjurer trick, "look at my right hand while my left one
does the trick".

Financial manipulators can play on investor's cognitive
and emotional
biases (see for example "framing").

Behavioral finance is two-edged: it helps understand and
control our investing biases, but manipulators can use it
on people who are not aware of those biases.


4) Repeating an opinion, until it
    looks like a truth.

Any information or opinion repeated like a slogan or
mantra, even from
the same source, tends to become
familiar (see familiarity) and to seem true and relevant.

- In their bag, hidden are many tricks, Jedi!

In financial markets,
the most usual deceptive / fraudulent tools tools are:

1) Cooked accounts or statistics,

2) False news, misleading signals, highly above average results
    and
promises, rosy interpretations

3) Over-complex operations that people, even
     professionals, can not understand fully,

They bring to the deception game a smack of "modernity" and
"financial engineering".

4) Selective information and smokescreens (hermetic wording,
    
call for secrecy) to hide the truth,

5) Spin (with heavy information bombing) from analysts or media.

6) Direct price manipulation,

- And so on. Imagination has no limits, 007!

- Yes, no need to really play the market, just ask suckers to send
  
cash by pretending you found a martingale that can multiply it.

- Certainly. Heard about the mad fox (*)?

- Do you mean Madoff, Dr. No?

(*) Seems 007 refers in general to Ponzi / pyramidal schemes

(see  those phrases), one of the most "traditional" financial
deceptions.

4) When do they do their tricks?

Timing is king for felons also.

Some periods are more prone to market excesses than
others.
They give higher opportunities to manipulate, bait
and deceive.

For example, in "bubblish" market periods, investors look always
for new meat to chew.

Also controls and rules start to relax, due to a contamination
by the general euphoria, greed and want to believe.

Such buying crazes, in which the "gullibility index" reaches
     its top, combined
with that lack of control, raise the temptation
     to promote
any lame duck.

- Taking advantage of the Orient-Express timetable,
   Hercules Poirot?

- You read their mind, Miss Marple!

- Certainly, but bubblish, did you say? You could have spared us
   that bullbubble story!

(*) To find those messages: reach that BF group and, once there,
      1) click "messages", 2) enter your query in "search archives".

Members of the BF Group, please
 vote on the glossary quality at
BF polls

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This page last update: 03/06/15            

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