“You can always count on people to engage in reckless and unethical behavior”

June 14, 2012

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Inefficiencies in the market stem from behavioral biases and misguided incentive structures.

Enron was able to report $3.3 billion in net income during the five years prior to its bankruptcy in 2001, while only $114 million in net cash was generated (or a mere 3% of reported income)

  • This would make for an interesting stock screen, albeit not particularly novel I suppose, especially for China shares. James Chanos’ process would be a good start. I know he’s big on filings and footnotes.

Studies show that over 50% of resumes them contain inaccuracies.

A study conducted by the security firm Pinkerton in the 1980s which concluded that 30% of the population will not only steal if an opportunity exists, but will actively create an opportunity to do so. Another forty percent will take the opportunity if they’re convinced they won’t get caught. Only 30% will not steal at all.

“I would not blink if one of my fund managers lost $10 million due to a wrong bet, but I would fire him immediately if he cheated $10 on his expense report.” ~ CEO of asset management firm

To Protect Against:

  • Establish clear guidelines and consequences
  • Align Ensure performance measurement systems and incentives
  • Have competent compliance personal and risk managers, people holding the checklist

Source: Harvard Business Review

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