Just because you’re not an expert doesn’t mean you shouldn’t invest. That said, there’s no doubt that financial jargon at times makes it difficult to understand information and thus access certain investments that appear to be attractive. All the more so since many complex expressions contain little more than hot air. Here’s how to avoid falling for financial lingo.
|What to remember
The markets abound with information on a wide range of financial products. This information is essential to making an informed decision. Unfortunately, not all information is factual or descriptive. It often take the form of long-winded texts with an array catchwords and superlatives whose purpose is to impress and create an air sophistication. Where this is the case, you may be dealing with financial bullshit.
With this in mind, investors looking for financial information should always remember the words of Nicolas Boileau-Despréaux: “What is well conceived is clearly stated, and the words to say it come easily.”
The prototype of bullshit
Eager to invest, you browse financial prospectuses then scour social networks for investment recommendations from acquaintances. Here are some of the “facts” you may come across during your research.
“Our cutting-edge algorithm uses the most modern artificial intelligence to exploit arbitrage opportunities in the global currency markets in real time, generating exceptional returns through dynamic risk management.”
“Investment Fund X has been designed with a quantitative-factor approach, combining rigorous stock selection with multi-objective optimisation models to maximise capital growth while minimising volatility.”
“This highly sophisticated and innovative structured product offers optimised exposure to a diversified basket of underlying assets, while maximising risk-adjusted returns through active volatility and correlation management.”
Impressive, right? But take another look. Do these descriptions really help you understand the products they’re trying to promote? The answer is no. Nevertheless, complex descriptions such as these aren’t uncommon in the world of finance.
Just because a product is sophisticated doesn’t mean it has to be presented in an obscure way.
One explanation is the technical complexity of the financial world. Technical jargon would thus be necessary to convey the complex realities behind a host of technical interactions. However, while the complexity is real, nothing justifies making it obscure and abstract. Too much sophistication creates a breeding ground for misunderstandings that complicate decision-making rather than simplifying it. Clearly, just because a product is sophisticated doesn’t mean it has to be presented in an obscure way. When it is, be on guard! You may be dealing with financial bullshit.
The bullshitter, more harmful than the liar
But what exactly do we mean by bullshit? The term “bullshit” has been conceptualised and has gained visibility since the 2005 publication of the book On Bullshit by Harry Frankfurt, professor of philosophy at Princeton University. According to the definition of the term, “bullshit” isn’t equivalent to a lie. The distinction is crucial, since, according to the author, bullshit is more dangerous to truth than lies.
Whereas the liar is consciously deceiving, the bullshitter isn’t concerned with knowing what’s true or false. They have a clear opinion on a wide range of subjects and insists they have the right to hold forth in abundance on subjects they don’t really understand. Put another way, bullshitters are dangerous because they often know enough about a subject to believe they’re legit, but not enough to realise they aren’t. They’re therefore quick to share their opinion with conviction on social networks, where information spreads like wildfire.
Bullshitters are dangerous because they often know enough about a subject to believe they’re legit, but not enough to realise they aren’t.
It’s not only humans who bullshit online. Chatbots are also a major contributor to bullshit. This is evidenced by the growing success of conversational agents such as ChatGPT, which have mastered the art of bullshit by assembling words to respond to questions from a human. Their answers are highly sophisticated, even when they can’t provide any factual information on a subject. The proof? The bullshit sentences at the beginning of this article were created entirely by ChatGPT. To do this, we first asked ChatGPT to clearly define financial bullshit, and then asked it to create fictitious descriptions of financial products based on its definition. Impressive, right?
When we asked the machine how it did it, it told us that it had created a “best of the worst” of financial jargon by combining terms frequently associated with excessive complexity and opacity when used to describe financial products.
The primary victims of bullshit
In 2022, Swedish researchers published the article entitled “Individual Differences in Susceptibility to Financial Bullshit”, which looks at who is most likely to fall for financial bullshit. As part of their research for the article they questioned over 1,000 adults in the United States. Each participant was asked about their financial assets, financial knowledge, sense of well-being and behaviour. The survey then tested participants’ actual knowledge by presenting them with a series of statements containing financial terms. Some of the statements were true (e.g. “When you buy a bond, you’re lending money to a company or a state”), while others were complete nonsense (e.g. “Hedging means investing your money in a single share”).
In your opinion, which group was better able to detect financial bullshit? Although it may come as a surprise, the answer is older women on lower incomes who aren’t overconfident in their financial expertise. The most likely to fall for bullshit are high-income young men with too much confidence in their knowledge. It’s also interesting that education level doesn’t seem to make any difference on the ability to detect bullshit.
Education level doesn’t seem to make any difference on the ability to detect financial bullshit.
According to the analysis, the higher their income, the less vigilant potential investors are in detecting hot air behind overly sophisticated financial language. Moreover, those who have a greater ability to detect bullshit are also those who feel more financially vulnerable. Conversely, the more credulous a person is about financial bullshit, the more financially secure they feel. This phenomenon can be summed up by the old adage, “ignorance is bliss”.
In short, just because you’re financially educated or used to working in the world of finance doesn’t mean you’re naturally protected from the potential effects of financial bullshit. Overconfidence may even make you less vigilant when faced with advice from your usual network. Fortunately, there are a few simple ways to spot financial bullshit on time and thus avoid falling for it.
Six tips to avoid falling for financial bullshit
- Check your facts and figures. When faced with a financial proposition, always check the facts and figures behind it. A proposition based on concrete data and verifiable points is more likely to be legitimate. If you take another look at the ChatGPT sentences at the beginning of this article, you’ll see they contain nothing concrete or verifiable. For example: “This highly sophisticated and innovative structured product offers optimised exposure to a diversified basket of underlying assets, while maximising risk-adjusted returns through active volatility and correlation management.” Assuming these statements were made by a financial adviser, what questions could you ask to turn them into facts and figures? If the claims have a solid basis, the person making them should be able to provide you with concrete points of reference.
- Identify the sources. Who’s the source of the information and what’s their reputation and track record? Put more trust in established, recognised experts than in catchy phrases from a stranger on social networks.
- Beware of bold promises. Be wary of promises of exceptional returns, foolproof strategies or miraculous investment opportunities. All investments involve risk and the risks increase in proportion to the returns sought.
- Ask for simple explanations. When faced with a statement containing complex financial jargon that’s difficult to understand, insist that it be explained in clear, simple terms. Anything that can’t be explained simply should put you on alert. You may be dealing with financial bullshit.
- Get help from recognised experts. There are many good reasons to seek help from experts when investing, and guarding against financial bullshit is certainly one of them.
- Avoid hasty decisions. Before making an investment decision, take the time to fully understand the financial information presented to you. Beware of aggressive sales tactics or time-limited promises.
To sum up, it’s essential to keep a cool head and critical mind when faced with financial propositions. Don’t be fooled by superficial statements and technical jargon; instead look for understandable, reliable and verifiable information that will let you make informed financial decisions.