Information or Misinformation; Which is Preferred in Finance
Business → Marketing & Advertising
- Author Trail Potter
- Published January 2, 2011
- Word count 1,053
Information is the other half of financial management (the first half being money). Without information, our money is stuffed in coffee cans and buried under the house, as was the case in the first part of the 1930’s when the nation was in a similar, but worse state. For most of the time since then, good information about how to manage money and assets was difficult to find and available only to a few. The late 70’s saw an increase in financial planning services to the middle class, and the 90’s introduced the ability to make trading decisions for yourself without the aid of a broker. Coincidentally, this trading ability came along with an explosion of information availability through the rise of internet, and also began a period of economic volatility that shows no sign of ending.
What we have discovered in the last few years seems to be that an amateur investor making trades on his own money, and a wall street professional seem equally able to put money into losing strategies. It’s assumed that the financial industry insider would have access to better information, but if they are achieving the same result, either their information is not better, or they are simply not acting on the better information. It’s only speculation on which scenario is happening, but let’s look for a moment at the kinds of decisions people make.
People tend to act on information that backs up their existing belief structure - in the behavior research field, it’s called Belief Bias. In a study published in Experimental Psychology in 2007, Henry Markovits and Walter Schroyens looked into how intelligent people overcome a faulty premise to achieve an unbelievable conclusion. They found that people use rational structures to back up what they want to believe, and most often fall back on the appeal to authority - which is actually a fallacy, a flawed argument.
Here is an example: Bernie Madoff engaged in a Ponzi Scheme, a well known and rudimentary con game, on a near global scale. His targets were not uneducated rubes and simpletons, but some of the most educated, wealthiest elites in the world; people with access (one would think) to the very best information. How could these people believe that in unstable conditions, one money manager could consistently deliver 25% returns when no one else could? How could they believe the statements they were being sent, with no follow up information? They believed it was possible because they wanted to believe it, and they had an expert tell them it was possible. The exclamation point on this lesson can be found with one of Madoff’s duped investors: Stephen Greenspan, author of "Annals of Gullibility: Why We Get Duped and How to Avoid It" lost $400,000 with Madoff’s funds.
Is the answer to bury the money in a can? If a leading expert in avoiding scams falls into the biggest headline scam of the decade, what hope can you or I have? That depends on whether or not you can maintain your healthy skepticism, and think more like a detective. When an investigator is looking for a problem, they analyze data, and look for any data points that are far outside the usual and expected range. If most fund managers are getting returns of 05% to 12%, then a guy pulling in 25% or more is going to attract their attention. They use their experience to tell them that an unusually high rate of return is usually because of illegal manipulation, rather than listening to the expert assure them that he has special skills or abilities. They deduce their conclusion by looking at data, rather than infer the reasoning based on a conclusion they would like to have.
This is how people - smart people - can act on bad information, even information that seems unbelievable when looked at with a sober eye. But what makes people create bad information? In Bernie Madoff’s case, it’s pretty obvious: the allure of unimaginable wealth. Bernie was at the top of his own empire with no one else checking his facts. A case like Washington Mutual is harder to grasp: it’s failure came because of hundreds or perhaps thousands of people knowingly creating bad information, e.g. both real estate agent and loan officer telling a buyer he or she can afford a house they clearly can’t. As we learn more about the complexities of how sub-prime mortgages were securitized, re-sold, insured, and finally shorted, the first step seemed absent from the post-mortem studies: why did the bank approve the loan in the first place?
The answer is the motive for creating bad information - the same reason Bernie Madoff did, for short term profit. The individuals involved in the purchase and loan approval were paid bonuses for the transaction itself, not for making a sound loan. These agents for both the bank and for the buyer were financially motivated by their own interests, and not by the interests of the home buyer or the bank. The logical fallacy comes in, because the buyer assumes that the agents approving the loan do act in the buyers interests, and so they are very willing to believe that they can, in fact, afford a 5,000 square foot home with the magic of a variable rate mortgage.
We cannot bury our assets in coffee cans - it’s not smart money management, and it stagnates the economy. We need to put our assets to work, and we need good information to achieve a full economic recovery. After such a tidal wave of bad information, coming from such seemingly knowledgeable sources, and having duped savvy investors, a certain degree of paralysis would be expected. But we cannot remain static, and the good information is still out there.
To make good decisions, you need information from the right sources - those sources who’s success is tied to yours - partners. That, and a healthy sense of skepticism for the deal that sounds too good to be true. In business, we rely on the information we receive, but we must also be responsible for checking the facts, and looking for that one data point that is out of sync, no matter how much we want to believe that we have found the miraculous exception.
Trail Potter is a contributor to the Abacus Financial writing team based in Houston, Texas. He has a background in financial planning with a focus on real estate and commercial growth patterns.
Abacus Financial - http://www.abacus-financial.net (Los Angeles, CA)- is the national expert in workouts of distressed commercial real estate borrowers and operating companies.
Article source: https://articlebiz.comRate article
Article comments
There are no posted comments.
Related articles
- Do Compelling Marketing Pictures Unlock Sales Potential?
- Become an SEO Expert: The Benefits of Certification
- 8 Essential Steps for Hiring and Collaborating with Commercial Photographers
- Marketing Strategies for Mooncake Suppliers: Standing Out in a Crowded Market
- Discover The Hottest TikTok Trends Taking Over Your Feed!
- How Crypto PR Exists Beyond Traditional Marketing
- How To Automate Affiliate Marketing?
- Effective Marketing Strategies for Tradies: Boost Your Business in 2024
- The Dos and Don'ts of Creating Engaging Online Content That Keeps Your Readers Coming Back
- Unleash Your Inner Artist with Google's Mind-Blowing AI Generator!
- The Impact Of Social Media Algorithms On Marketing Strategies
- Redefining Success with a Holistic Approach to Marketing Measurement
- Dong Yuhui being accused of being racist against women because refusal to sell women's underwear.
- Creating Buzz in the Hallways: High School Advertising Techniques That Get Results
- How does social media marketing tie into a digital solution service?
- Custom DVI Cables: Everything You Need to Know?
- Diet Plan for Weight Gain
- Navigating the Dynamic Landscape of Hot Trends in SMM Panels
- Unveiling AI Brilliance: Leonardo Laboratories at the Fore of Innovation
- Unlock Your Career Potential: How Our Digital Marketing Institute Can Propel You Forward in Mumbai
- Social Media Marketing: Harness the Power of Online Platforms for Success
- Growing Your Business Online: How Gardeners Can Utilize Digital Marketing
- Measuring and Boosting ROI Across SEO, Email, & Social Media
- Navigating Challenging Business Conditions: The Power of Strategic Marketing
- Unlock Your Style: Fortnite Skins for Sale
- The Ultimate Guide to Color Grading: Techniques and Tools for Beginners
- Here Are Some Effective SEO Strategies For Startup Success
- How to Create an Effective Business Marketing Plan
- Traditional Direct Print Marketing Isn't Dead: Unveiling Its Untapped Potential
- New Age Student Recruitment: How AI is Revolutionizing International Enrollment