Friday, October 3, 2014

The Glasses of Blind Trust

In the extreme, blind trust is a naive, gullible, blissful, Pollyana-ish trust in almost everyone and everything. Wearing blind-trust glasses is easy for many of us at times because it doesn't really require much effort or thought. It's also easy because, as the University of Maryland's Eric Uslaner points out, "We may not be born trusting, but our inclinations to place faith in others start very early in life." Indeed, most children have a high propensity to trust.

No question children are more trusting, and therefore much more creative. Somewhere in adolescence, I suspect that changes.
                                        -Charles Green Founder, Trusted Advisor Associates

Even as adults - even if we have had bad experiences with blind trust - deep inside, most of us really want to trust. We want to believe that somehow our political leaders will really do what they promised us they'd do . . . that our work peers really do have our best interests at heart. . .that some new investment opportunity really will produce a high return with little risk. . .that a spouse or partner really does have a reasonable explanation for what appears to be totally untrustworthy behavior. . .that the e-mail offering a sizable fortune in exchange for providing our checking account number to help someone get funds out of a foreign country really will end up with a life-changing deposit into our account.

Because we want those things so badly, we ignore the evidence. As the expression goes, "That which we want most urgently, we believe most easily." And the cost can be great. When we view the world through blind-trust glasses, we become ripe targets for scams, frauds, and "con" artists. Contrary to the assumption of some people that the "con" in "con artist" is short for "convict" (meaning criminal), it is actually short for "confidence"; in other words, a "con artist" or a "con man" is someone who works to earn your confidence and trust and then, having gained it, takes you for everything you're worth.

If it seems too good to be true, it IS too good to be true. Mark Twain
Blind trust was one of the reasons Bernie Madoff was able to defraud investors out of billions of dollars, deprive thousands of people of their life savings, and wreck charities. After pleading guilty fraud, Madoff  said that he'd had "too much credibility with them" and the SEC mission was that he'd had "too much credibility with them" and the SEC examiners had never asked for basic records to validate his operations. "It never entered the SEC's mind that it was a Ponzi scheme," he said. Additionally, Madoff's accountant did not meaningfully audit Madoff's business or confirm that securities even existed.

Many observers believe that the global financial crisis was precipitated by too much trust being given to the mortgage industry in the United States without sufficient oversight - in effect becoming blind trust that was ultimately abused, resulting in the housing bubble that triggered the problems initiating the crisis. Others point to what might appear to be the near-blind trust given to traders at some financial firms - traders such as Nick Leeson, who was trusted by Barings, the United Kingdom's oldest investment bank, to operate as both floor manager for trading and the head of settlement operations (positions normally held by two different employees for purposes of checks and balances). Leeson engaged in unauthorized speculative trading that literally brought Barings down. 

Pyramid schemes, financial scams, fraud - all add up to an enormous cost, estimated to be as high as $2.9 trillion a year globally, with 88 percent of enterprises having been hit by at least one type of fraud in the past year. Fraudulent activity becomes more apparent in difficult economic times, when perpetrators find it more difficult to hide behind their perpetual cycle of attracting and deceiving new victims. In other words of Warren Buffet, "It's only when the ride goes out that you learn who's been swimming naked." It is also during hard times when people desperately want to believe what they're hearing that they find themselves more likely to extend trust blindly.

There are times when blind trust might appear to work. In August 2010 New York Post articles told of an ad executive who was approached by a homeless man outside SoHo restaurant, asking her for some change to get some Vitamin Water. So the man asked if he could borrow her card and get a couple of other things as well. She asked, "Can I trust you?" "I'm honest, yes," he replied. So she handed him her American Express card. People who saw the interaction thought what she did wa insane and told her they doubted he would ever come back. But little more than ten minutes later, he surprised them by returning with the card in hand. He had bought deodorant, body wash, a pack of cigarettes, and Vitamin Water, totaling about $25. Giving her the card, he said, "Thank you for trusting me."

That particular extension of blind trust turned out to be a good experience for both the giver and the receiver, and perhaps there are some lessons here that can be learned. However, the blind-trust approach is risky, and it typically does not represent the smartest way to operate in a low-trust world.

(From Stephen M. R. Covey's "Smart Trust")

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