Protect Your 401 From The Next Madoff and Other Lies
How can you spot lies before you get suckered by the next Bernie Madoff?
It’s no secret many of us lost big bucks on investments that the bond rating agencies like Standard & Poor’s assured us were low risk. So is there any hope you can avoid losing money again? The New York Times reports that “corporate sleuth” Jules Kroll’s firm just got approved by the government to rate bonds.
It’s easy to be impressed reading that Kuwait and Haiti trusted Koll’s “private CIA” to track down assets of dictators like Saddam Hussein and Jean-Claude “Baby Doc” Duvalier. But it doesn’t tell you what you need to know: How can you spot lies before you get suckered by the next Bernie Madoff? After all, why trust the new ratings by this corporate sleuth?
Or why trust me? I’ve taught the science and art of lie detection, emotional awareness and negotiation to Homeland Security and to business people around the world, like Peter Thiel, the angel investor behind Facebook, and to students and faculty at Harvard and Columbia Business Schools. And I’m about to teach JAMS, the world’s top arbitrators.
Let me share the key bad news and good new. Bad: people on average simply cannot tell lies from truth. But the good news is that research shows that there are scientific ways to catch lies. In this blog series, I will share some of them with you.
Problem one: You’re listening to the wrong person. Remember you can’t catch a lie if you’re talking with another victim. Even Bernie Madoff’s children claim they weren’t in on the game! A top lawyer I trained in lie detection told me his negotiation secret. “I never tell my team the number I got from the CEO as our final offer. And I’m pretty sure the CEO never tells me the truth either.”
Solution one: Get closer to the real decision makers. It’s never been easier. Under federal law, you can now access many of the conference calls when top executives talk with investment analysts. A Duke University study found that one could predict the firms that would perform poorly by analysis not of what they said, but how they said it.
Solution two: On the other hand, remember the butler and the nurse know it all. Rose Mary Woods, Nixon’s secretary, probably lied about the famous 18 minute gap in the White House tapes. But she was the rare loyalist. So talk with the people at the very bottom of the totem pole, too. One investor in a start-up figured it was rigged by asking routine questions of one of the many “busy” people “working” in the office. The person couldn’t answer basic questions. It turned out the “worker” was an actor hired to fool investors into thinking there was a lot going on.
That may also explain why one study showed investors who put their money in local businesses outperformed the market as a whole. If you’re investing locally, you can poke around at both ends. Try to talk with executives. Ideally see them in person. And try to look around the business – or government project – and talk with anyone you can find.
What do you ask? What do you look for? We’ll cover that in future blogs, but you can rest assured it’s not just their words.
Here’s one preview: there’s no magic bullet. When people lie, their noses don’t always grow. And, if someone’s pants are on fire, maybe they dropped a cigarette! To find the truth, you need to look for clues or what I call soft spots. The soft spots don’t mean someone is lying. But it means that something is going on, and it’s your challenge to figure out what.
Take eye contact. A lot of people waste their time thinking that someone is lying if they look up and in one direction. I was helping at a lie detection training with some spies when a former Canadian border patrol person said this. “Which direction?” I asked. “It depends,” he said, “on whether you’re right or left handed.” I said I was right handed. He didn’t say anything. “Well, really no one could remember, so we just pulled over anyone who looked up.” Now at least you know to look ahead when you visit Canada.
Science tells a different story. Researchers have found there’s no pattern between which way people look up and their truthfulness. But looking up is a soft spot because it usually means the person is thinking harder. That’s all. It doesn’t mean someone is lying. On its own. But if I ask your birthday and you look up, then that’s a problem – unless you don’t speak English or don’t hear.
Think back to the actor in that start-up. I wasn’t there. Here’s my guess. When the investor asked specific questions about the business, the actor might have looked up. It was a soft spot. But it would only be a soft spot. Maybe another person might look up because they were trying to think about how to explain a complex idea to a novice – or how not to give away genuine secrets. We’ll learn more about that kind of hypothesis testing in future posts.
See for yourself. Look at this video of Charlie Sheen on Good Morning America.
He’s asked when he last used drugs. When do his eyes move? What is he thinking about? Do you agree with the interviewer that this is his most candid interview ever?
Now try again. Look at this video of CNN’s Piers Morgan asking Sheen if he is under the influence during the interview.
Keep checking the comments on this post for my perspectives. And stay tuned for more lie detection and negotiation tips in future posts. What’s left of your 401k will thank you.
Clark Freshman is a tenured professor of law at University of California, Hastings College of Law, and teaches lie detection, emotional awareness, and negotiation around the world. You can see videos and learn more at clarkfreshman.com.
Weeding out bad financial planners is one thing, but the real test is to weed out the bad guys like DSK: http://lawblog.legalmatch.com/2011/05/20/redefining-the-us%E2%80%99s-diplomatic-immunity-policy-after-dominique-strauss-kahn/
Now that’s a detection feat!