THE BIZOP NEWS

Markus May, writing at The Naperville Sun, has some nice insights about purchasing a franchise.

Often we see people who are interested in establishing their own business in order to avoid working for other people.

Often a downsized executive is no longer interested in working for someone else and wants to buy a company to provide for the family.

At that time, we may discuss whether buying a franchise is something to consider.

A franchise is basically a license from a franchisor to run a business. The franchisor provides the business owner with marketing and training support.

For example, Subway allows people to buy a franchise to operate individual Subway stores. Subway in turn provides training, marketing and product support in exchange for certain fees.

Is buying a franchise right for you?

One benefit is that the franchisor will train you on how to operate the business. If you don't have experience running a company, this may be very valuable.

Further, with a well-known franchise, you obtain a marketing brand which would presumably include a built-in customer base."

Now, the one problem is that Markus doesn't tell us how to review the franchisor's FDD to determine whether the promised training inthe marketing material is likely to be delivered. Do you know how to do this? If not, please see the nearest professionally qualified franchisee attorney.

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Diane Levin has a neat post about logical reasoning - and no I won't tell yo my score, although if you know that I favour using a logic, called intuitionistic  logic, which does not have (p or not p) as axiom, you can guess my score fairly accurately. 

"Last week I posed a challenge to my readers: to have a go at "The Cash Register Exercise", an uncritical inference test.

I promised to divulge the correct answers yesterday, but unfortunately circumstances intervened and prevented me from doing so, and so, with my apologies, I post them today.

For those of you who missed last week's post, I repeat the instructions and the exercise here: To complete the exercise, read the following story.

Below it are 12 statements about the story. After you read the story, determine whether each of the 12 statements is T - true; F - false ; or ? - you do not have enough information to determine whether the statement is true or false Allow yourself no more than 5 minutes to complete the exercise.

Ready?

Here goes: The Cash Register Exercise The Story A businessman had just turned off the lights in the store when a man appeared and demanded money. The owner opened a cash register. The contents of the cash register were scooped up, and the man sped away. A member of the police force was notified promptly.

12 Statements about the Story

1. A man appeared after the owner had turned off his store lights.
2. The robber was a man.
3. The man did not demand money.
4. The man who opened the cash register was the owner.
5. The store owner scooped up the contents of the cash register and ran away.
6. Someone opened a cash register.
7. After the man who demanded the money scooped up the contents of the cash register, he ran away.
8. While the cash register contained money, the story does not state how much.
9. The robber demanded money of the owner.
10. It was broad daylight when the man appeared.
11. The story concerns a series of events in which only three persons are referred to: the owner of the store, a man who demanded money, and a member of the police force.
12. The following events in the story are true: someone demanded money, a cash register was opened, its contents were scooped up, and a man dashed out of the store.

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The intellectual value in studying business opportunity fraud is that if we are able to understand these exercises in simple frauds, we might be able to short circuit errors of judgments in investments - in which the underlying purchase is not inherently fraudulent.

The purchaser of a business opportunity is almost certainly being defrauded, but it remains a mystery to regulators how to prevent these schemes from gaining traction.

The regulator's response to pretend that if the purchase just had more information, a more rational choice would be made.

The regulator's response is wrong: providing more objective information to purchasers already under the sway of the phantom dream being sold by the con criminal pushes them to make irrational decisions quicker.

Robert Cialdini explained this version of cognitive dissonance over twenty years ago, but we still haven't learned how to integrate this finding into fraud prevention.

But the message is clear: if the mark has bought into the phantom fraud, providing systemic evidence showing that the dream is a fraud, will likely have the unfortunate effect of closing the deal. Marks striving for consistency will close faster if they believe that their rational self will scuttle the deal.

We should be very skeptical about the curative powers of rationality, if there is no critical discussion about when the information will be disclosed to the purchaser.

Ian Ayers may be making a similar point, when discussing one of Shiller's solutions to the sub-prime mortgage problem.

"Shiller also thinks that the ultimate buyers of the mortgages were making systematic errors.

He wants improved disclosure about financial securities to help the ultimate mortgage buyers from making ill-advised purchases:

The subprime residential-mortgage backed securities were grossly misjudged because no one outside the rating agencies understood the information to correctly gauge the soundness of the mortgages on which they were based.

The stage was perfectly set for unscrupulous mortgage originators to lend to low-income people who were likely to default, and for mortgage securitizers to sell the soon-to-default mortgages to unsuspecting investors. (P. 136)

I'm skeptical about Shiller's claim that the ultimate buyers lacked sufficient information or the sophistication to understand the data.

Or even if they did, this is not an error they are likely to make again. Once bitten, twice shy."

The latter claim about not making the error again is overly optimistic.

But, it is unrealistic to expect a person in the grip of buying their dream home, for no money down, to avoid the regret of not being "in", will process information from criminal mortgage originators in a rational manner.

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