The Number 1 Tip for Due Diligence - from Taleb
There is a mystery associated with due diligence. Virtually all of the participants in a franchise fraud, business opportunity scam or some other scheme, did not do proper due diligence before the fact. Why do they lack in imagination?
After they had discovered the fraud or scam, however, many of these individuals easily used the Internet to discover the relevant resources -which allowed them after the fact to perform the requisite investigations.
I have always puzzled over this mystery -until I read Nassim Nicholas Taleb's new book, The Black Swan. Here is an interview with Taleb, in November 2006, and independent website on Taleb.
The book is about confirmation bias, the tendency to tell confirming stories, or deciding what we want the evidence to be, and then finding it!
(The book should be read by many decision makers who have to make real decisions in the face of real uncertainty, but I suspect that this will not happen.)
Why should it be so hard to overcome the confirmation bias? Isn't it a mistake of thinking, easily corrected once we have labeled it a fallacy? After all, once we realize that 1 + 1 doesn't equal 3, we don't keep on making the same simple arithmetic error. So, this fallacy should be a surface error?
Nope. It is deeper than that. Listen to Taleb's riff on why this is.
Assume that a legislator with courage, influence, intellect, vision, and perseverance manages to enact a law that goes into universal effect and employment on September 10, 2001; its imposes continuously locked bulletproof doors in every cockpit (at high costs to the struggling airlines) --just in case terrorists decided to use the planes to attack the World Trade Center in New York City. I know this is lunacy, but it is just a thought experiment. ...This legislation is not a popular measure among the airline personnel, as it complicates their lives. But it would certainly have prevent 9/11.
[But] the person who imposed locks on cockpit doors gets no statues in public squares, not so much as a quick mention of his contribution in his obituary. 'Joe Smith, who helped avoid the disaster of 9/11 [which never happened] died of complications of liver disease.' Seeing how superfluous his measure was, and how it squandered resources, the public, with great help from airline pilots , might well boot him out office. ...
He will retire depressed, with a great sense of failure.
Preventing disaster by proper due diligence brings no rewards, no hero ceremonies --indeed some of the "heroes" of 9/11 earned their status simply by being there.
"Who gets reward, the central banker who avoids a recession or the one who comes to "correct" his predecessor's faults and happens to there during the economic recovery?We human are not just a superficial race (this may be curable to some extent); we are a very unfair one."
So what should we make of this?
Simply this: when purchasing a franchise, business opportunity, or some other investment start your research in the world in which you have been defrauded. Imagine you found out that the whole scheme was a scam or fraud? What would you do in that world?
Chances are you would first search the internet for "scheme scam" or "scheme fraud". Then you might look up specialized lawyers, statutes or laws, that were there for your protection. You might try to find other victims -you would go to the police to find out that they had no interest. You might reconstruct why you fell for this piece of magical selling. But the key is: you would be highly motivated to uncover the fraud or scam.
So act as if you are in that world now, to prevent ending up there later.
