Apr

15

I have been considering the many confidence games that players in the market are exposed to with particular reference to the many false signals of imminent decline, programs of fixed quasi arithmetic bent, and expert con men who claim to have an easy way of making money. I used to use myself as an example of playing an unwitting role, i.e., being a key middle brow naive person who blindly goes his happy way allowing experts to take his money.

Indeed, I've written on the subject. And when I asked the collab the best way to research this subject she said, "go to our past writings on it." But I'm a little rusty on it and I think there have been so many new cons in the market lately that are so extensive that any previous typology has to be augmented. Any help or ideas that you all could give on this subject, particularly those related to some of our discussions on funds, that might be not as good as they seem, would be appreciated. I found the following article very helpful as a jumping off point for eliciting some market cons. 

From Jim Sogi:

It is something about the mark that allows the conman to 'turn' the victim. As with the baseball maven, the appeal to the esoteric investor who has the depth of capital to withstand drawdowns must appeal to some 'streak' in investors. In confidence games it is the greed, or dishonesty of the mark that is the key to the game. Each person, no matter how optimistic and bright, has a dark side.

Often the most apparently cheery have the darkest side. It is the job of the conman to find that side that can be used to turn the mark to his advantage. Or he finds his specialty niche. This is how elderly are preyed on with winning drawings, or the Nigerian scam. It is the combination of need with greed and a dose of dishonesty in the mark. The typical description of a con focuses on the perp, but the study of the victim yields more lessons. Most do are not aware of these seeds of darkness within, and there lies the danger.

This is the same technique used in sales, cross-examination, and religious proselytizing. Leading the victim down the primrose path feeding the victim's inner need and darker impulse. It is what happens in the market so often. Look to the victim. Look to yourself for the secrets of the con.

Eason Katir writes: 

If ya gotta lotta nerve
And ya gotta lotta plenty
Five'll get ya ten
And ten'll get ya twenty

— Singsong of the 3 card monte grifters, as they throw the
cards.

It has been written that, "In religious confidence games, this means that the religious leaders must convince the prospects that they (leaders and present members) have a special relationship to a personal God."

Market equivalent: the supplicant must prove he is worthy (accredited) and have a pious bankroll (high minimums) to have a special personal relationship with the elite hedge fund.

"The doctrine of a personal God supports: (a) perfect (infallible) leaders, (b) perfect (inerrant) sacred books, (c) perfect (marvelous) miracles, and (d) perfect (eternal happiness) posthumous rewards."

Market equivalent: the hedge fund prospectus supports (a) managers who have had a good run at some period, supported by much media hype, (b) infallible trading edge supported by scholarly white papers, (c) backtesting, hearsay, testimonials (d) eternal retirement happiness: the TV commercial or glossy magazine ad depicting the WASPy looking character in his argyle sweater sailing his wooden boat through retirement with his loving wife by his side.

"Incorrect details can expose a con game. Accordingly, details such as the location of Heaven and means of transportation thereto are not mentioned. The posthumous rewards are claimed to be wonderful, but no details are given which can be checked in the present. "

Market: black box systems. Opaqueness of current hedge fund positions.

"The advantage of the confidence games with posthumous promises, of course, is that no deceased person is going to return and ask why he did not receive his reward."

The market hasn't worked this one out as well as the article's example yet. Best it can do is provide tables and charts showing hypothetical increase in value over some long period of time, and a posteriori rationalizations about why a system stopped working.

"The religious leaders have another advantage. They carry little inventory and have small expenses."

Financial salesmen have this same advantage. They don't have to finance an inventory of expensive cars or other widgets. The mark puts up his money, and sees only flickering pixels in his browser representing his bet. Another confidence game: Feng Shui is popular. The delusion that one can fix one's problems by rearranging the furniture.

Market analogy: Beat the market by rebalancing sectors.

Michael Cook writes: 

On of the most interesting insights in "The Big Con", for me, was that it represented a new insight into human nature, namely, the depths of delusion and self-deception a mark can be led into. The very fact that the "big con" is possible was an important discovery.

And if you look at the world through the eyes of a con, it seems that everybody is conning everybody all the time, and everyone is conning himself most of all. The con, in his sociopathic cynicism, thinks that everyone is being conned except himself, but there's some saying to the effect that it's always easiest to con a con man. Why should this be true? I think it is because the most effective way to con someone is to believe the con yourself. As George Costanza said: "It's not a lie if you believe it." And once you get in the habit of believing your own lies you lose the distinction between what you know and what you don't know, the "taste" of knowledge. So the most dangerous cons suck you in by virtue of people who believe in them, and who you trust.

Hypnosis has always fascinated me as a phenomenon, and as a description of the state of mind we inhabit so often, a sort of "waking sleep", in which we are driven by suggestions, associations, and habitual patterns and reactions. Con men harness this power of the mind, as do advertisers. Are not advertisers con people? And salespeople? And don't we all sell ourselves and promote ourselves, and in so doing, engage in cons? Creating a resume is a good example - the goal is to gain the confidence, or at least the interest, of the person (or machine, these days) that is reading it. And it is shaped, edited, selectively biased - from one point of view, a "pack of lies".

The con man uses a person's propensity to con himself against him, like the way a judo master uses the momentum of his opponent against him.

If I try to convince you of anything, i.e., persuade you that it is true, am I "conning" you?

It is a compelling metaphor for all human interaction, which is a little depressing. I don't really like looking at the world through a con man's eyes, and yet I have been conned, and didn't like it, and am therefore skeptical of people's hidden motives at times.

But someone said "you must be as wise as serpents and as innocent as doves" - alert to the confidence games all around you, and even in yourself, but somehow not going through life assuming the worst about people.

One of the most visible "behavioural biases" is overconfidence, and it always amazes me when people make claims to know something that they can't possibly know. Which happens every single day. And that's their job - there is a demand for that. Portfolio managers want analysts to "pound the table" on their ideas, to have confidence, and some don't care to hear what that confidence is based on.

So overconfident salespeople marketing products they believe in - Caveat Emptor!

Russ Sears adds:

I have been attending dog-training classes on Saturdays, which is really a class on "trainer training." One thing the instructor said that struck me was that most of your dog's behavior problems can be corrected, if you can get the dog to believe you have a omniscience about everything important to them.

To paraphrase, the dog won't go nuts over that leaf that flies by the window. He will say 'my master must know it, it must be ok.' And eventually you can take him for a walk and that squirrel running by your path, will not cause him to bolt if you say 'no.' He will say, 'its ok, my master saw him and knows what he is doing.'

Dogs want you to correct them before they do it, while they are thinking about it. Still, there certainly is some element of physical force to establishing dominance. This is downplayed as many owners overestimate the need to be "omnipotent." It's more about consistency. Always show them you know what they are thinking.

It seems many of the con's tricks are similar. People have a need to believe that someone knows everything, and therefore the assumption is they are in control. One does not imply the other, however, as the media and dooms-dayists would have you to believe.

For the pacifist owner, dominance need not be harsh, but rather omniscient and omnipresent. Always have a plan. Rattle the keys annoyingly, throw rocks over their heads when they bolt etc. The preparedness causes the dog to think they knew that would happen so he knew what I was thinking. Rather con thinking is, you knew it "could" happen and were ready to imply that it "would" happen.

Perhaps this is the "set-up." Where the journalist digs out the "dirt," the reader never suspects that the story was planned, even written long ago. The subprime is a good example…


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