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Value Investing And Why You Hate Cheap Things: It's counterintuitive, but a growing body of research suggests that you just don't like cheap things. In this episode, we discuss how price as a proxy for quality can be in dangerous in investing and give clues as to how behavioral investors can sever this spurious connection. by Standard Deviations with Dr. Daniel Crosbyratings:
Length:
9 minutes
Released:
Feb 20, 2018
Format:
Podcast episode
Description
How to Avoid Financial Scams
Stephen Greenspan is a psychologist and author of the Annals of Gullibility: Why We Get Duped and How to Avoid It. Greenspan’s book outlines notable instances of gullibility including the Trojan Horse, the failure to locate weapons of mass destruction in Iraq and the bad science surrounding cold fusion. Most of the book focuses on anecdotes, but the final chapter sets forth the anatomy of being fooled and attributes it to some combination of the following factors:
• Social pressures – Fraud is often committed within “affinity groups” such as people who hail from a similar religious background.
• Cognition – At some level, being duped represents a lack of knowledge or clarity of thought (but not necessarily a lack of intelligence).
• Personality – A propensity toward belief and difficulty saying “no” may lead people to be taken advantage of.
• Emotion – The prospect of some emotional payday (e.g., the thrill of making easy money) often catalyzes questionable decision-making.
In a field that is sorely understudied, Stephen Greenspan literally wrote the book on the topic. He is not just an expert on gullibility, he is the expert on gullibility. Which is why it may surprise you that he also lost 30% of his wealth to notorious fraudster Bernie Madoff.
In a candid assessment of his own gullibility, Greenspan wrote in the Wall Street Journal:
“In my own case, the decision to invest in the Rye fund reflected both my profound ignorance of finance, and my somewhat lazy unwillingness to remedy that ignorance. To get around my lack of financial knowledge and my lazy cognitive style around finance, I had come up with the heuristic (or mental shorthand) of identifying more financially knowledgeable advisers and trusting in their judgment and recommendations.
This heuristic had worked for me in the past and I had no reason to doubt that it would work for me in this case.
The real mystery in the Madoff story is not how naive individual investors such as myself would think the investment safe, but how the risks and warning signs could have been ignored by so many financially knowledgeable people, including the highly compensated executives who ran the various feeder funds that kept the Madoff ship afloat. The partial answer is that Madoff's investment algorithm (along with other aspects of his organization) was a closely guarded secret that was difficult to penetrate, and it's also likely (as in all cases of gullibility) that strong affective and self-deception processes were at work. In other words, they had too good a thing going to entertain the idea that it might all be about to crumble.”
Greenspan has excellent insight into his own decision-making and motivation. He admits that he was relying on a shortcut (“Let other people think about it”) that had worked in the past, without considering why it might not work this time around. Likewise, the professionals in the story had no interest in critically examining a system that was making them look like geniuses! As Francis Bacon said beautifully, “The human understanding when it once adopted an opinion draws all things else to support and agree with it. And though there be a great number and weight of instances to be found on the other side, yet these it either neglects and despises or else by some distinction sets aside and rejects; in order that by this great and pernicious predetermination the authority of its former conclusions may remain inviolate.”
Just as Irvin Yalom found it difficult to entreat young lovers to think critically about the potential flaws in their relationship, it is nearly impossible to get someone who is making money to ask, “Why might I be wrong?”
Stephen Greenspan is a psychologist and author of the Annals of Gullibility: Why We Get Duped and How to Avoid It. Greenspan’s book outlines notable instances of gullibility including the Trojan Horse, the failure to locate weapons of mass destruction in Iraq and the bad science surrounding cold fusion. Most of the book focuses on anecdotes, but the final chapter sets forth the anatomy of being fooled and attributes it to some combination of the following factors:
• Social pressures – Fraud is often committed within “affinity groups” such as people who hail from a similar religious background.
• Cognition – At some level, being duped represents a lack of knowledge or clarity of thought (but not necessarily a lack of intelligence).
• Personality – A propensity toward belief and difficulty saying “no” may lead people to be taken advantage of.
• Emotion – The prospect of some emotional payday (e.g., the thrill of making easy money) often catalyzes questionable decision-making.
In a field that is sorely understudied, Stephen Greenspan literally wrote the book on the topic. He is not just an expert on gullibility, he is the expert on gullibility. Which is why it may surprise you that he also lost 30% of his wealth to notorious fraudster Bernie Madoff.
In a candid assessment of his own gullibility, Greenspan wrote in the Wall Street Journal:
“In my own case, the decision to invest in the Rye fund reflected both my profound ignorance of finance, and my somewhat lazy unwillingness to remedy that ignorance. To get around my lack of financial knowledge and my lazy cognitive style around finance, I had come up with the heuristic (or mental shorthand) of identifying more financially knowledgeable advisers and trusting in their judgment and recommendations.
This heuristic had worked for me in the past and I had no reason to doubt that it would work for me in this case.
The real mystery in the Madoff story is not how naive individual investors such as myself would think the investment safe, but how the risks and warning signs could have been ignored by so many financially knowledgeable people, including the highly compensated executives who ran the various feeder funds that kept the Madoff ship afloat. The partial answer is that Madoff's investment algorithm (along with other aspects of his organization) was a closely guarded secret that was difficult to penetrate, and it's also likely (as in all cases of gullibility) that strong affective and self-deception processes were at work. In other words, they had too good a thing going to entertain the idea that it might all be about to crumble.”
Greenspan has excellent insight into his own decision-making and motivation. He admits that he was relying on a shortcut (“Let other people think about it”) that had worked in the past, without considering why it might not work this time around. Likewise, the professionals in the story had no interest in critically examining a system that was making them look like geniuses! As Francis Bacon said beautifully, “The human understanding when it once adopted an opinion draws all things else to support and agree with it. And though there be a great number and weight of instances to be found on the other side, yet these it either neglects and despises or else by some distinction sets aside and rejects; in order that by this great and pernicious predetermination the authority of its former conclusions may remain inviolate.”
Just as Irvin Yalom found it difficult to entreat young lovers to think critically about the potential flaws in their relationship, it is nearly impossible to get someone who is making money to ask, “Why might I be wrong?”
Released:
Feb 20, 2018
Format:
Podcast episode
Titles in the series (100)
- 10 min listen