William Gamble
Lying numbers

You can be successful if you question what everyone else knows—and the patience to wait for the inevitable

At Delphi in Greece, the god Apollo was supposed to speak through his oracle, a priestess known as the Pythia. The Pythia sat on a tripod seat over an opening in the earth. The fumes from the opening were supposed to allow the Pythia to channel the god and give her a vision of the future. Some sources depict the Pythia as delivering her prophesies in an agitated state and speaking in a strange and unintelligible voice. These ravings were interpreted by priests and reshaped into enigmatic prophecies that have been preserved in Greek literature. We like to think that economic and financial predictions are much better, but has anything really changed?

In a recent conference held at King's College, Cambridge a group of economists including five Nobel laureates, could neither agree on the cause of the crisis nor the necessary remedies. They did agree ‘that the financial and economic crisis had exposed fatal flaws in their subject and ideas were urgently needed to keep economics relevant.’ In a lecture last year, Economics Nobel laureate and columnist, Paul Krugman stated that most macroeconomics of the past 30 years was ‘spectacularly useless at best and positively harmful at worst’. Ouch!
Last week in the US, we were entertained to see two of the most highly-paid former executives of Citigroup hauled before a Congressional committee.  Former CEO Charles Prince said he was sorry three times. His defense was that ‘Citigroup could have lost its market share or key employees’ if it stopped the speculation. Of course, the option of bankrupting the company was apparently a better idea.

Robert Rubin, the former Goldman Sachs executive, US treasury secretary and chairman of Citigroup's executive committee denied he had anything to do with it. This denial forced the Phil Angelides, the panel's chairman to remark, “Either you were pulling the levers or asleep at the switch.”

So why are we paying these people billions of dollars in compensation? Professor Gratton of the London Business School pointed out that in theory these giants of finance are paid huge sums, because ‘they are particularly skilful, and that they have information that is valuable. Now, the interesting thing from an academic perspective is that there isn’t really any research to show that what they do is particularly skilful.’

Well, I don’t think that is quite true. What they do is particularly skillful. The reality is that no one, not the world’s best economists, not the best financial analysts, not even Goldman Sachs can predict the future. What they are really skilful at doing is selling. They were really good at selling the idea that they can actually use the financial and economic wizardry to predict the future.

This then is the basis for much of what passes for financial advice and the entire financial industry. It is not about the skill, because no one has the skill to do more than guess as to what is about to happen. The skill that they do have is to market the idea that somehow their methods, their research, their algorithms, their high speed computers are somehow better than the next guy or even a dart board.
There is another skill that some people may actually have. The problem is that we do not know which ones. The skill has to do with information. Some people have access to it while others do not.

Markets are supposed to be efficient and economics is supposed to function according to theory if and only if accurate, complete and timely information is available to all participants at the same time. The reality is that even in the most open and efficient markets policed by well-funded and well-supported securities watchdogs, all information does not get to the market. Some of it goes to certain individuals or institutions, which can make them lot of money.

For example, an American bank, WaMu was a major player in originating sub-prime mortgages. According to an internal WaMu report dated September 2007, a review of 132 loans found ‘confirmed fraud’ in 115 cases. Goldman Sachs is charged by the US securities watchdog of creating an investment vehicle for one of their customers that based on information available to Goldman, was designed to fail. In both cases the highly compensated executives of WaMu and Goldman had the information and the rest of us did not.

If the quality and quantity of information in developed markets is subject to question, it is far worse in emerging markets. In a prior piece I discussed the problems with information provided by State-owned and family companies.
The lesson for investors is that the powerful tool is not information, but the knowledge that the information is distorted. The truth is that money is a limited quantity and despite the spin, the stories, exaggerations, misrepresentations and even outright falsehoods, it eventually runs out and the truth is exposed. You can be successful if you have sufficient doubt to question what everyone else knows and the patience to wait for the inevitable.

(The writer, William Gamble, is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).

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COMMENTS

Rita Baxi

7 years ago

An excellent thought provoking article.
Thank you for providing such worth reading articles.

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New ASCI guidelines likely for insurance companies soon

The entity will look at implementing the standards set down by the insurance watchdog, by the second half of 2010

The Advertising Standards Council of India (ASCI) has plans to include guidelines for the insurance and financial sectors soon. Considering that there have been many complaints filed against insurance advertisements, the council aims at modifying the guidelines further. Alan Joseph Collaco, secretary general of ASCI said, “We will do it (the modifications) once we get a consensus from insurance companies, probably around the second half of 2010. At present, the percentage of complaints received (concerning insurance companies) is 10% (of the total number of complaints being received). However, more insurance companies are advertising with every passing day.”

However, the implementation isn’t likely to happen immediately but is on the cards. Mr Collaco further added that the complaints received by the council are on these lines: “In one advertisement, fixed deposits are compared rather unfairly with insurance. In another advertisement, insurance is shown as a route to fulfil your child’s dreams.”

There are some minimum standards advertisers and brands need to adhere to, which is in compliance with the IRDA (Insurance Advertisements and Disclosure) Regulations, 2000 referred to as ‘Advertisement Regulations’ and the code of conduct formulated by ASCI and any other regulations as applicable.

Clyton Fernandes, a research analyst (banking and financial services) with Anand Rathi Financial Services, believes that it is a positive move for the insurance industry, “It is good and more about awareness, more than anything else. At least it will make insurance and financial companies more cautious; people are often mislead about products. This might not be good news for financial companies in the beginning as it will impact their profit margins, but it will be fruitful for customers as they will get a better perspective about different products.”

SBI Life Insurance is in favour of this move initiated by the advertising council. Chandramohan Mehra, head (Brand and Communications), SBI Life Insurance told Moneylife, “Any move that is in the interest of the customers will always be welcomed. The basic ingredient to keep the customers’ trust intact is to initiate honest communication.”

In the month of March 2010, the council had implemented specific guidelines on the auto and food & beverage sectors. Mr Collaco had said, “ASCI realises that cutthroat competition among products and the need for uniqueness can sometimes lead to senseless exaggeration and depiction of unsafe practices.”

ASCI is a self-regulatory voluntary union of the advertising industry that plays the role of a body that receives complaints from consumers and the industry with the help of its Consumer Complaints Council (CCC), against advertisements which are considered false, misleading, indecent, illegal, leading to unsafe practices, or unfair to competition. ASCI had upheld complaints against six advertisements in February. These advertisements include brands like Dabur Chyawan Junior, Shanti Badam Amla Hair Oil, Maruti SX4, IMS CAT Approach Program, Tata AIG Insurance, and Mahindra Flyte Power Scooter. More documents on complaints are expected in the near future.
 

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COMMENTS

John Matthew

7 years ago

This is a good move. I was executive secretary of the ASCI and I appreciate this move on their part.

Sanjiv Kapoor

7 years ago

Good Move but needs to wegh the Pros and Cons

Sanjiv Kapoor

7 years ago

Good Move but needs to wegh the Pros and Cons

Roopsingh

7 years ago

REALLY VERY GOOD MOVE-if it is implemented properly

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