Posted by: qmaxim | February 18, 2008

"Never ask a barber if you need a haircut."

Good read in my view
Mistrust is Good
By Dhirendra Kumar | Feb 18, 2008
There’s a saying (or perhaps it’s a line from a poem) that good fences make good neighbours. This means that when the fence between your neighbours’ land and yours will be high and strong then you will get along better with your neighbours. There won’t be any grounds for suspecting one’s neighbour when things go wrong. What this proverb is saying that if one builds in the assumption of a certain amount of mistrust, then things actually run better and there’s effectively more trust in an interaction. The important thing here is that the mistrust is institutionalised. No one has to take a decision as to whether a particular neighbour is untrustworthy or not. No one has to bear the humiliation of being the only one to be fenced out. In this sense, a universal, all-encompassing mistrust is a good basis on which to build honest and confident interactions. I’m sure you know where this leading to. I think there isn’t enough mistrust in the financial industry in India. In the interactions between individuals and companies we need a lot more mistrust built into the system. And when the system doesn’t provide enough mistrust, then we should individually build it into our behaviour.

This institutionalised mistrust should work by recognising a basic truth-that individuals and businesses will always work in their own interest, and not of anyone else’s. When their own self-interest happens to be aligned to their customers’, then they’ll work in customers’ interest too. However, there’s no chance that anyone is going to work in the interest of any third party. This is the natural order of things, this is the way things have always been and if you act as if this is not true then as a customer you are going to get burnt. Look at the whole issue of IPO pricing which is top of mind with investors today. Why on earth should anyone expect promoters or their advisors to not extract every last paisa from investors that they think the market will bear? Why should they leave anything on the table? As investors, that’s the assumption one should start with and make decisions accordingly. Apply the same principle to other financial interactions. Dealing with a bank? A stock broker? A mutual fund salesman? An insurance agent? A credit card issuer? If you are making any decision based on information provided by the other party, then it’s safe to assume that the information will be tailored to maximise their interest and not yours. I know the theory is that their interests are aligned with their customers but that’s just the theory, it doesn’t happen in practice. As the legendary investor Warren Buffet said, “Never ask a barber if you need a haircut.”

But those are the fences you can build as an individual. At a broader level, we probably don’t have enough mistrust built into our system. There are a lot of unstated assumptions that market mechanisms will take care of those who abuse customers/investors. I don’t think this is working as well as it should. Such a mechanism works in the long-term. In a growing economy, there’s plenty of room for successively taking new waves of customers and investors to the cleaners and not have to worry about the long-term.

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