Are we good at detecting fraud or lies?

Try to think about when you were lied to.

You may be thinking: “Probably a few weeks ago when ….” or “I wouldn’t be lied to, even if I was, I could spot it!”

But a lie was probably told to you or by you in the last few hours. It may not be out of malice, and it could occur anywhere – from news articles to the people around you! Lying isn’t rare and it doesn’t require anyone to be morally corrupted.

The concept of lying has been ingrained in our lives as a social lubricant.

· “I can’t make it because I have so-and-so appointment”

· “Baby, did you lose weight?”

· “Please don’t hesitate to contact me” at the end of our work emails

· And the most common one “I’m on my way!”

People lie to make the other party feel good about themselves, to provide some reassurance and support. Sometimes, we may also lie to avoid getting into conflict or to highlight the faults of others. We also protect ourselves from unpleasant and intrusive information. And we also attempt to influence others by creating an image of perfect impressions.

We are actually poor lie detectors, even those trained to do so, and even machinery that are designed to detect lies can be cheated by one who has truly believed his story. We may only spot lies by the rare off-chance.

There are 3 reasons why we are bad at identifying lies.

First, the Truth Bias. We naturally have the tendency to assume that others are telling us the truth. We think that there is no reason why anyone would lie to us. This is especially so if the source is released by a well-known authority, and it comes in as another layer under Authority Bias as well.

Second, to further exacerbate the abovementioned phenomenon, we are also Cognitive Misers. Our monkey brains just don’t want to think and exert effort to be a little critical of what others say. It takes less brainpower to assume that others are saying the truth.

Third, we are somehow tuned to accept lies since young. “If you don’t sleep by 10pm, the monster under the bed will get you!” or the very renowned Santa or the Tooth Fairy. We grow up to naturally led by the nose through lies.

Now, what does lie detection or having the Spidey sense for companies’ actions have to do with investments?

We are not too interested in frauds such as Ponzi schemes, shell companies for money laundering, or financial misconduct. What we should be looking at are inflated earnings announcements, red herrings, or complex financial disclosures that are usually not on the radar of law enforcers.

The recent 22.6% fall in Meta’s shares to $249.90 was due to a stark difference between the expected earnings and the actualised earnings. Looking back at how Facebook changed its name to Meta and how publicity was all focused on the Metaverse, a red herring was created to lure investors’ attention to the prospects of the Metaverse and to ignore a sinking ship in advertisement revenue from Facebook. Apple’s announcement of tighter privacy and reduced tracking impacted many stocks alike. Right after Meta’s earnings announcement and reasoning – Twitter, Pinterest, and Snap followed suit with the fall. The competition against Facebook doesn’t just end there as many youngsters are known to be on Tiktok now and are not even utilising Facebook in the first place. Would you consider this as “lying” by creating a diversion?

Company staff may also feel the pressure to achieve higher sales results and financial gatekeepers may also be blinded by presenting a good performance amidst this time of inflation. Keep wary of signs of corporate “lying”. It could pay off to be a devil’s advocate to sudden changes in companies’ direction, reporting style, or other abrupt changes that put a question mark on your head.

If you're interested to chat on this topic or to exchange ideas, please feel free to drop me a message on Telegram @elijah2212 or through email elijah.thj@gmail.com!