Detection of deception in financial industry

Tuesday, March 8th, 2016 by Harry.

We would all be interested in becoming better at detecting lies, wouldn’t we? There should be a lot of money to be made if we were able to single out those misleading and lying corporate executives. However, it is not such an easy task, although we all do tend to believe (deep down inside) that we are good at it, and that our own sixth sense is better than everybody else’s.

This is the first post to start what I hope will prove an interesting discussion of the developments in the science of personal credibility assessment and the relevance of these for the financial industry. (Mainly investments, as I am a fund manger myself.) Deception detection for application in finance is undoubtedly a very promising and exciting field.  Having such skills could be of immense value to the profession, as suggested by Institutional Investor Journal already back in 2013.

Finance professionals are just as bad at detecting lies as any other man on the street…Flipping a coin would be just as accurate.

When it comes to investment professionals the belief of being in possession of a superior intuition in matters of lie detection is widely held. We (I will use we, since I am part of the profession) do call it gut, or experience, or think that we are able to observe something everybody else is missing. With one more twist though! we do tend to have elevated confidence in our ability to do so. This has been shown in a study commissioned by  CFA where researchers have looked at the ability of CFA society’s members to detect lies.

Surprisingly for the investment community, but not surprising to the deception detection experts, the study shows that the finance professionals are just as bad at detecting lies as any other man on the street. Flipping a coin would be just as accurate. As financial analysts or fund managers, we often tend to think that we excel at making sense of large amounts of information and believe ourselves capable of seeing patterns ahead of others. However, it is rarely the case. Overconfidence in own abilities is often discussed as a persistent behavioural bias in the field of finance.

What can we do to actually help build confidence in our judgements of a person’s credibility, without relying on our fuzzy gut feeling or whatever else we think we know  about typical liars? What can we do to improve our ability to decipher corporate communications and management intentions?

First of all, we need to debunk the myths. The same study showed that most investment professionals believed that relying on body language clues is more helpful in getting a better read on who is lying than relying on e.g. language based clues. Let’s bust some myths right now and right here.

Just as a reminder, this is the first in a string of posts where we will discuss ways to become better at detecting lies and how we could use that in the field of finance.

Harry Lansley
Article by Harry Lansley

Specialist in Micro/Subtle Expressions and Behaviour Analysis. Harry is certified to the highest level in the Facial Action Coding System (FACS) used for the objective measurement of facial muscle movement.

2 responses to “Detection of deception in financial industry”

  1. Craig Steyn says:

    Dear Kristina

    By way of introduction my name is Craig Steyn and I am currently doing my EIA diploma with the objective of enrolling in the Masters degree next year. I accidentally found this web page and I have just submitted my FACS module assignment to Jordan [FACS relevant to the investment / accounting /auditing environment]. I find your post interesting because I searched the internet and I had difficulty in finding any articles or research specific to FACS and the investment / accounting / auditing environment. Whilst drafting my assignment I got the sense that this is a field that has not been adequately researched in terms of truth and deception and if it has been researched the papers are perhaps not that easy to access.

    Since I am an accountant / auditor by profession I am particularly interested to read any available research on this topic hence my mail to you. I would really appreciate it if you could perhaps mail me a link or suggestion of research in this area. I am of the opinion that truth and deception is an important aspect that funds / investors / shareholders and financial institutions have ignored mostly because they remain uninformed and therefore reactive to fraud / deception / non disclosure etc. instead of being pro active and adopting the science available.

    Thank you in anticipation.

    Regards

    Craig

    • Harry Lansley says:

      Hi Craig,

      I’m happy to hear you enjoyed the article.
      We share your opinion that behavior analysis has significant value in the financial world and we are committed to this area.
      Kristina and the team are working hard developing tools that can support financial professionals and help root out fraud within the industry. Veriscope is the umbrella where we are conducting this work.

      I will be in touch with you via email to point you in the direction of some resources you may be interested in. As you mention, the research remains light in the area.

      All the best,
      Harry

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