Financial bullshit: you may be more susceptible than you think

Episode 2 of The Investing Show is now online. Produced by and co-presented by Robin Powell and Abraham Okusanya, The Investing Show is designed to help investors make better decisions. The first episode looked at lessons to learn from the Neil Woodford scandal. In the second episode, Robin interviews Gustav Tinghög and Mario Kienzler from Linköping University in Sweden about a study they’ve just produced on consumers’ susceptibility to financial bullshit.

So who are most vulnerable to it, and why? What can investors do to do be on their guard against it? And are there any lessons for the financial services industry to learn from this research?

We hope you enjoy the programme, and if you do, please subscribe to it and add a comment.

You’ll find a transcript below.

TRANSCRIPT

Abraham Okusanya: Hello, and welcome to the Investing Show. We’re here to help you make good investment decisions. I’m Abraham Okusanya, the founder of Timeline: the company on a mission to help people retire with confidence.

Robin Powell: And I’m Robin Powell; financial journalist, blogger and author. Hi Abraham.

Abraham Okusanya: Hi Robin. What have you been looking at this week?

Robin Powell: Well, as you know better than anyone, Abraham; one of the biggest leading indicators of people’s tendency to be swayed by bad investment advice is their susceptibility to put their faith in pseudo-profound financial jargon, and a new academic study seeks to measure consumers’ ability to detect financial bullshit.

Abraham Okusanya: So, where does this research come from?

Robin Powell: It’s from three researchers at the University of Linköping in Sweden, and it’s based on an online survey of investors in the United States. Before we go on, I should apologise to anyone offended by the phrase, “bullshit”. It is though the term that the researchers themselves use. I started by asking two of the study’s authors, Mario Kienzler and Gustav Tinghög, where their interest in this subject came from.

Mario Kienzler: I think it’s kind of interesting if you look at the financial landscape – not only as a researcher, but also as a private person – it often gets tricky. I mean, everyone knows the situation when you start with new insurance or you maybe look into some banking products and, at least speaking for myself, you often feel a bit lost in the language. I think that was the starting point for us, where we thought: OK, if we feel like that, maybe other people also feel like that”.

Gustav Tinghög: I also think that we were interested in communication and how bad financial communication affects behaviour. So it’s about understanding basic decision making, and what contributes to good and bad decisions.

Robin Powell: So what exactly were you trying to find out with this study?

Mario Kienzler: We wanted to understand, in general, people’s ability to distinguish what we call “financial bullshit” from more profound financial statements; and how that ability then impacts people’s perception of the financial future and also their ability to make financial decisions, essentially.

Gustav Tinghög: We departed from actual statements made by Nobel Prize winners and notable people from within the finance field, and then we kind of adapted those sentences and made bullshit statements that were similar to those. And we measured whether or not people could distinguish the bullshit statements from the actual profound statements.

Robin Powell: What sort of people then are most susceptible to the sort of financial baloney that we are talking about here?

Gustav Tinghög: I should say, we didn’t measure intelligence. Previous research on bullshit has shown that people who are more intelligent are also better at detecting bullshit. We did not see that in our study. We did measure a cognitive ability, which is something slightly different, and saw that people with high cognitive ability – people that are more analytical – are also better at distinguishing profound statements from bullshit statements. What we saw in our survey was that young males who are overconfident in their own financial knowledge are the most susceptible to bullshit.

Robin Powell: Mario, let’s be honest. The finding that young overconfident men are particularly prone to being fooled by bullshit is not exactly surprising, is it?

Mario Kienzler: No, I wouldn’t say so because perhaps it has also to do with the fact that you’re supposed to know these things. Maybe you feel like you’re supposed to know how to invest as a young guy.

Robin Powell: So, young men find it hardest to detect financial gobblydegook, who then is best at it?

Gustav Tinghög: So that would be females; people who are older; and people who do not have an inflated belief in their own financial knowledge. Those would be the ones that were less susceptible to fall for these bullshit statements.

Robin Powell: So older females are the most sensitive financial bullshit detectors. Another interesting finding from this study is that levels of education make no difference to people’s ability to distinguish between meaningful statements and gibberish. Also: counterintuitively, the higher up the income scale you are, the more susceptible you are to being impressed by bullshit. I asked the authors whether they were surprised by that.

Mario Kienzler: Well, we were a bit surprised but, on the other hand, it also, to some extent, makes sense. If you have more disposable income, if you are maybe not strapped for cash perhaps, or you generally just have more income to invest; then that means perhaps that you don’t have to be as diligent for each and every investment, compared to a person that has maybe very little money to invest. You’re very careful then: what kind of product, what kind of service are you using? And if you have more opportunities – because you’re more wealthy, or you have a greater income – that maybe allows you to think a bit more as if not everything has to be checked out to its full extent. Some investments, they might work out; some might not work out. So that is a potential explanation why we see this effect.

Robin Powell: Gustav. Time to put you on the spot. What advice would you give to investors who want to be on their guard and be able to spot financial nonsense when they hear it?

Gustav Tinghög: My very simple advice would be: don’t be afraid to ask stupid questions. I think that’s the most fundamental advice I can give; and if you don’t understand something, ask what it actually means.

Mario Kienzler: I would maybe be careful if something sounds rather good, but you then don’t understand what exactly the product means or how the service works. Then it goes back to what Gustav said: then especially, I would ask: what’s going on there? Is there a reason why I don’t understand what’s going on? Is the product designed that way? Or is it maybe just a bit complex, and asking questions will help me to to understand it and be more comfortable in deciding if I want to invest or not?

Robin Powell: Are there any lessons for the industry here?

Mario Kienzler: While you have some bad players that are that are maybe not interested in straightforward, honest communication; you have a lot of companies also where you can see that they’re trying .There are maybe some limitations because some legal language and some technical language just needs to be in contracts. This is very hard for people to understand, but some companies really try to make it as easy as possible with supporting documents or other aspects to really help people to understand it. But of course there are also other service providers that are not interested in that. But I personally think we are going to see more financial institutions seeing that this is a win-win situation: if the people understand what they’re buying, there’s more trust from investors and consumers in general; and that should have a positive impact also on your bottom line as a company.

Gustav Tinghög: I think it’s important also to be aware that bullshit is all around us. And it’s not only for the financial industry. I bullshit all the time, whenever I get stressed. Whenever we don’t have the answer for something, we tend to turn to bullshit as a way of thinking; but it’s important that you stop and be honest to yourself and to others that not everything you say will always be correct. And if you don’t know something: be honest, say, “I don’t know”.

Robin Powell: Gustav, how much of it do you think is deliberate?

Gustav Tinghög: I would say that most bullshit is not deliberate. We feel like we need to have an answer and we don’t have it, and then we start to speculate and we want it to make sense. Therefore, we use impressive words in order to impress other people. That’s why bullshit happens.

Mario Kienzler: At least a lot of consumers perceive that a lot of financial products and services contain bullshit communication, bullshit language. I think that is something that we saw going into this study and preparing it and looking at what other people have done. There is an indication of that. If then that means that there is actually more bullshit, that might be actually that investing in the stock market and in financial products has become more popular the last couple of years. So maybe some bad actors; or – like Gustav said – companies that want do good, but then find it tricky to navigate the waters and produce bullshit by accident also swept the market, so to speak.

Robin Powell: Now, the idea of bullshit being used as a device to part unsuspecting people from their money has been the subject of academic research before. Most notably in 2005, when the Princeton professor of Philosophy, Harry Frankfurt, published his seminal work called simply ‘On Bullshit’. Gustav and Mario are certainly hoping to build on their latest research. So what, I ask them, do they plan to look at next?

Gustav Tinghög: One thing that we know very little about is what constitutes good and bad bullshit. What is it? Also, we focus very little on the bullshitter. Who is the bullshitter and how do we interpret the bullshitter? Being a good bullshitter is very often something that is actually important in work life; being able to come up with these impressive statements from out of nothing. I think that people view these people as very intelligent and that might be problematic. So I would like to focus very much on the bullshitter going forward. I think that’s fascinating.

Mario Kienzler: Another route would be to look at companies that actually want to reduce the bullshit in their products and services. How can they work with that? What are considered more “bullshitty” types of statements by consumers, and how can then companies reduce them? I think that would also be very interesting, and at least these financial institutions that are really acutely aware of the situation and want to reduce their own bullshit might be very interested in that.

Robin Powell: Guys, do you think the essential problem is that we demand simple answers from financial professionals and stock market pundits when, in many cases, there aren’t any simple answers to give people?

Gustav Tinghög: Yeah, I think you’re right. The financial world is very unpredictable. It’s difficult to know what’s going to happen and, if there was a simple answer on how to invest your money in order to get rich, everyone would do it. So I think you’re right. And I also think, from my own experience, that it’s much easier to give advice on stuff you don’t know that much about; because, as soon as you become knowledgeable about something or you know a lot about it, you start to understand how complex things are and that you cannot often really give simple answers. It’s easy to give advice if you know a little bit about something, but it’s difficult to give advice if you know a lot.

Mario Kienzler: Yeah, exactly. I think that is the issue. I think if you have the label of financial commentator or financial expert, and you don’t know exactly what’s going on: that’s maybe a tricky situation, as Gustav already said earlier. You may be in a situation similar to ours here. You’re getting interviewed. Then, just simply saying, “I don’t know”, might be the most truthful answer you can give. But maybe that’s not really what the person asking you the question wants. And also maybe you don’t want to appear like you don’t know, in that situation.

Robin Powell: So let’s see what Abraham made of that. So, what about this finding that young, overconfident men are particularly susceptible to financial bullshit?

Abraham Okusanya: These findings confirm existing research that shows that overconfidence often leads people to overestimate their understanding of financial matters. One recent example of this happened just last year. Young, inexperienced investors engaged in a share trading frenzy fuelled by discussions on the social media platform, Reddit. Let’s just say, it didn’t end very well. The takeaway is that all investors, young and old, need to recognise that there is so much bullshit out there, particularly when it comes to investing your money. A good rule of thumb is: if you don’t understand something well enough to explain it to a ten-year-old, you probably shouldn’t invest in it.

Robin Powell: The researchers found that women and older people are generally more discerning. Is that your experience?

Abraham Okusanya: Well, what can I say? Our bullshit alerts get better with practice. We get older and wiser, for sure.

Robin Powell: Now, interestingly, both Gustav and Mario made the point to me that sometimes the best and most appropriate answer – and the one consumers really need to hear, frankly – is simply: I don’t know. Do you agree with that?

Abraham Okusanya: I couldn’t agree more. Having the courage to say, “I don’t know” is underrated, in financial services and in life. So you’ve heard our opinions, but what did you make of our latest interview? Please send us your views; and, from all of us here, thank you for joining us and goodbye.