How do we know if someone is cheating?
That’s the question anyone searching for the truth has to face. Parents want to know what their kids have been up to. Lovers want to know if their partners have been faithful. And investors need to know if the companies where invest have been cooking the books.
Finding out the truth has always been a challenge. When it comes to financial reporting, companies have all kinds of ways – and excuses – to fudge their numbers. Insurance companies have reserves where they can sock away excess earnings. Manufacturing companies use production and delivery estimates that they can inflate or deflate. Banks are supposed to set aside reserves against bad loans, but there never seem to be enough when things really go south.
Getting to the heart of things is something we all struggle with. So how do we find out? Four centuries ago, Shakespeare wrote about uncovering the truth when he wrote Hamlet. In the play, Prince Hamlet needs to find out if his Uncle Claudius – who also happens to be king, and his stepfather – murdered Hamlet’s father. There are all kinds of ways for Claudius to hide the truth. Eventually though, Claudius unburdens his soul in a private moment when Hamlet is listening in the background.
Hamlet discovers the truth by using a disciplined process. First, he acts like he’s crazy to put everyone off their guard. Now we would say that Hamlet is using behavioral science in his research. Second, he discusses what he learns with a close friend. He reviews his successes and mistakes to learn and adapt. He’s very analytical. Finally, Hamlet develops a plan to confront Claudius at just the right moment. He’s organized and clear.
Successful research works the same way. We should use analytical, behavioral, and organizational tools to learn the truth behind what corporate managers choose to tell or not tell us. We need a systematic way to gather and examine data, review our conclusions, and then implement any decisions we need to make.
Hamlet found what he was looking for because he had a plan. There’s a quote in the play that describes Hamlet, and it ought to describe our research as well: “Though there be madness, there is method in it.”
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”