June 29 2020

The right to a jury trial has been described, most recently this May, as “a fundamental right. It goes back centuries in our history, and it will never be removed at all.” (For the U.K. government’s latest proposals attacking this right and why they are not a good idea see here.)

Despite this, juries have not always been loved, especially by some in the legal establishment, including some judges, those who think that the law is far too important and complicated an issue for ordinary persons, who are simply not clever enough to understand. It uses the complexity beloved by lawyers to justify keeping the whole process within this charmed, closed circle, a legal elite. It is an argument often heard in relation to fraud trials, conveniently forgetting that sniffing out dishonesty does not need a degree, that it is often some of the apparently cleverest people – formally anyway – who fall for some of the biggest conmen around.

If you need convincing, look no further than the story of Wirecard, summarised by the Financial Times here.  It is a cautionary tale, one we have seen before, time and again. Remember Enron?Or Polly Peck? Or Theranos? It makes it all the more baffling why clever people fall for it over and over again.

The essential elements are usually the same:-

• A new, often disruptive, entrant into the market or the repackaging of a boring staid company.
• A charismatic CEO with ambitious expansion plans, an attractive story to tell and a talent for PR.
• A novel way of providing a basic service, presented as a simplification, and which could be categorised into the “too good to be true” category. No-one is able to explain why, if it is so simple, others have not done this.
• The use of some wonderful new technology. Everyone wants to be associated with this, even if the number of people keen on it is vastly greater than those who really understand it.
• The use of complicated corporate structures and inter-company transactions, often in a variety of offshore jurisdictions, making scrutiny of the individual transactions and the company’s overall position much more difficult.
• When critical or difficult questions are raised, responding aggressively with action from lawyers and PR specialists. Protection of reputation is apparently more important than responding to the substance of any criticism.
• Rapid high growth, sustained year after year.
• Becoming the latest “darling” of the stock market, investors and governments.

In all these cases, any number of highly expert advisors: analysts, accountants, auditors, bankers, lawyers and others seemed oblivious to what was going on. Did they choose to turn a blind eye? Or were their critical faculties simply dazzled by the fees to be earned?

What is perhaps different – and troubling – about the Wirecard story is the way regulators, in this case, the BaFin, seem to have abandoned its critical faculties, its willingness to probe behind the facade (surely an essential task for any regulator) and the need to listen to those voices who raised questions (from as far back as 2008) about the company.

Worse: not only did the BaFin not listen to those voices (investors, hedge funds, whistleblowers and journalists), it tried to take action against them, to shut them down, to prosecute them. The regulator abandoned its role as a disinterested supervisor and acted as if its interests were no different than that of the company.

How could so many apparently clever people be taken in? For the oldest reason of all: they believed what they wanted to be true, what they hoped was true. They formed an opinion then ignored any facts that did not fit. They ignored troubling messages or concerns because they came from the “wrong” sort of people: hedge funds and short sellers (boo! hiss!), foreign journalists doing down a national champion (double boo!) and so on. Shooting the messenger is so much easier than listening to an uncomfortable message.

Clever people are not immune from making these basic mistakes. Being clever does not necessarily make you clear-sighted. It does not necessarily make you courageous. Nor does it automatically make you curious.

There is an inestimable value in having an ordinary person’s view, in having people prepared to ask obvious, even stupid questions, in benefiting from the collective experiences, perspectives and opinions of a random group of 12 strangers, the wisdom of a small crowd, unencumbered by the sort of “groupthink” which can afflict those working closely together with the same types of people with largely similar perspectives.

Remember this when the lack of expertise of jurors is cited as a reason why they should not be involved in fraud trials. If expert and experienced people are so easily taken in, perhaps that expertise is not that valuable at assessing dishonesty and bluster and spin. If experts fail to ask obvious questions or fail to follow up on concerns raised, what value – really – does their expertise have?

Photo by Jon Tyson on Unsplash

March 25 2020

During this time of enforced isolation, these quotes from one of my favourite books caught my attention.

They are from The Leopard by Giuseppe Tomasi di Lampedusa: a wonderfully evocative portrait of a Sicilian aristocrat, Don Fabrizio Salina, at the time of Italian unification. His nephew supports unification because “Everything must change so that everything can stay the same”. (The book is beautifully narrated by Alex Jennings here or in Visconti’s gorgeously lush film version).

Don Fabrizio admires his cynical nephew, clever enough to fall in love with a member of the new moneyed bourgeoisie. But he knows that, as a member of the old ruling class, he is part of “an unlucky generation …. suspended between the old world and the new …. and ill at ease in both”.

The Piedmontese politician sent to persuade him to become a Senator in the new Italy is told by Don Fabrizio that he is not suitable. He has no illusions. He lacks “the faculty of self-deception, that essential requisite for anyone wanting to guide others”. The politician needs to look for those who are “good at masking and blending … their obvious personal interests with vague public ideals.”

There have been few better summaries of the political class.

The politician leaves, his final thoughts on the Sicilians summarised as: “All were fundamentally equal. All were comrades in misfortune.”

Not just Sicilians, these days.

Photo by Mattia Bericchia on Unsplash

July 30 2019

Ever since the financial crisis started there has been a plethora of explanations about why traders and bankers behaved as they did.  Some have been purely descriptive: what happened and when, allowing us to marvel at the folly of it all, at least in hindsight.  At the time these clever financiers were praised by pretty much everyone from Chancellors down. There were very few pointing out at the time that the Emperor had no clothes.

But increasingly there have been attempts to use the insights gleaned from other disciplines to explain why what happened in the way it did. The latest neuroscientific findings were used to describe the biology of boom and bust (The Hour Between Dog and Wolf, for instance). Behavioural economics has had its say, as has nudge theory. Rather than nudging people to behave well, all the payment and reward incentives nudged financiers into doing what suited them financially irrespective of the effect on the customer and no matter what the expressed good intentions of the firm were. Goodness! Whoever could have predicted that, without a theory to explain it.

Psychologists have had their say, of course, though only a cynic might wonder about how much actual knowledge about the realities of life in the financial sector they have. No matter: all could opine merrily on the importance of culture in finance and on all the wonderful insights that these disciplines could bring to those seeking to manage and regulate the financial sector.

And now the anthropologists have got in on the act, as in this article by Gillian Tett. In it she points out how anthropologists have tried to analyse the cultural patterns, the rituals and symbols, even the words people use in finance to understand what was going on under the surface. In truth, the insights brought by anthropologists (at least as described here) are pretty obvious rather than thought-provoking; the article does not need them to be worth reading.

What is interesting, though, is how commentators on finance and perhaps also regulators are, perhaps unconsciously, making the same mistake as many of those traders and bankers. They are over-complicating, coming up with all sorts of theories and hypotheses apparently grounded in science or other social studies, described and interpreted by experts, using technical language to describe common human behaviours. Just as too many traders developed over-complicated products which they only half-understood and managers kidded themselves into believing that they had found a foolproof solution to valuation or risk management or any of the other difficult tasks they had, so there is a risk of developing overly complex explanations for why so many people behaved so stupidly or worse. The risk is that the more complex the explanation, the more people feel that it is all too difficult really to do anything about it or that this is something best left to the culture specialists, psychologists and other “ologists“.

Keep it simple might be the motto. In the end, by whatever means the conclusions are reached, what everyone in finance needs to remember is this:-

1. Trust is at the heart of finance.
2. Everyone in a financial institution is, in one way or another, managing risk.  There is no such thing as a risk-free product or institution.  Or, indeed, individual.  Understanding the risk you are running and managing it properly is what every bank, every employee in a bank, every customer of a bank, every shareholder in a bank, every investor in a financial product and every regulator of a bank is doing.  Or ought to be doing.
3. Understanding properly is hard work.  There is no magic bullet, algorithm, theory, process, spreadsheet, AI or killer piece of management information which will do it for you. Thinking is often required.
4. There is no way of eliminating risk.  Mitigating and minimising it: yes.  Eliminating it: no.  If anyone says otherwise (and much of the financial crisis was caused as a result of clever people thinking they had done just this and learning, painfully, that they hadn’t) they’re a charlatan or worse.
5. Human beings, even clever ones (particularly them, it sometimes seems) do not behave rationally around money. Money and emotions are bosom pals. As any decent novelist or lawyer dealing with divorces or wills will tell you.  The “animal spirits” Keynes described do not just apply to market participants but to all of us.
6. Managing people, understanding them, motivating them, inspiring and leading them, teaching them, setting them a good example, setting them high expectations and making it clear what the boundaries are, what behaviour will not be accepted, what crosses the line, helping them get past their frailties, working effectively with them is hard work, the hardest work anyone ever has to do.  And by far the most valuable – and rewarding.
7. Finance is there to serve others, not itself.  It is a means to an end and the moment it (and the people in it) start thinking of themselves as indispensable, as set apart from the society they are part of, as entitled to special consideration and immunity from challenge is the moment when hubris sets in.  Nemesis will surely follow.

Photo by Lesly Derksen on Unsplash