Detecting Lies in the Financial Industry

Figuring out if someone is lying is sometimes difficult, but many think it can be done. Conventional wisdom has it that the most reliable way is to look for classic non-verbal cues, such as not making eye contact, sweating profusely, and fidgeting with hands.

This belief that you can detect when someone is lying through non-verbal signals is transcontinental. A global study done in 2006 by The Global Deception Research Team reveals that across 82 nations, close to 75% of people believe that the biggest giveaway when someone is lying is through their eyes, specifically gaze aversion.

Unfortunately, this is simply not true, says Maria Hartwig, associate professor of psychology at City University of New York and co-author of Detecting Lies in the Financial Industry: A Survey of Investment Professionals' Beliefs.

Hartwig co-authored the study, which will appear in the Journal of Behavioral Finance in 2014, with Jason Voss, content director of the CFA Institute, and former co-portfolio manager of the Davis Appreciation & Income Fund (DCSYX). It is based on responses from 607 members of the CFA Institute and explores the psychology of deception in the finance industry.

The study found that financial professionals--between 66% and 68% of them--also think that they can detect when people are lying. And lie detection is imperative when analyzing an industry that is hit by scandals of the Madoff variety.

Hartwig and Voss held a session on Nov. 1 at the Toronto CFA Society where they outlined some of their findings. The two biggest surprises were that there is no physical indication that someone is lying--as Hartwig says, "no Pinocchio nose," and that there is only a weak behavioral difference between liars and truth tellers, despite what mainstream media may tell you.

"Guaranteed if I list all of the behaviors associated with lying, it wouldn't help you at all in a judgment situation," says Hartwig.

The study revealed that financial analysts who hold the CFA designation are on par with average persons in regards to lie detection. "Fifty-four percent of professionals in the finance industry will figure out if something is a lie. That's in line with lay persons or any other group," says Hartwig.

In fact, she says in some cases you might as well guess if a person is telling the truth because you have a 50% chance of being correct. "Overall, accuracy of lie detection all clusters very closely to the 50%-54% average."

So, how can an analyst tell if a financial professional is lying, other than by trying to judge physical reactions or behavior?

The key is to ask strategic questions, says Hartwig, so that you can systematically pull information out of that person:

• Gather hard data such as financial reports, and then look for patterns


• Try your best to confirm all the facts--it's imperative to be knowledgeable before accusing someone


• Prepare relevant, direct questions


• Keep questions specific, as they are more likely to generate honest answers compared to open-ended questions.

For example, if an analyst is meeting with a fund company CEO who is being vague, the analyst should ask specific questions such as, "With Bob no longer managing your $1 billion equity fund, which in the last 12 months lagged its peers by 7%, what are the immediate steps you're going to take to ensure that investors' money is managed in a way that stays true to the fund's original mandate?"

That question will be more effective than, "Your team lost its top manager last month, so what is your plan moving forward?"

The first question is more likely to generate an honest response because it's specific; the second question is too ambiguous and gives the CEO room to lie.

Hartwig and Voss acknowledge that it can be difficult to wrap your head around the fact that verbal cues give away more than non-verbal cues, but they insist you should try it anyway next time you're in a situation where you need to decipher if someone is lying.