How to Tell When the CEO is Full of It
Trying to catch someone in the act of lying remains far more art than science, but that hasn’t stopped a long line of social psychologists, academics, and magazine editors from trying to boil it down to some universal basics.
David Larcker, a professor of accounting at Stanford University, is the newest entrant into the field of lie detection. With the help of Stanford Ph.D. student Anastasia Zakolyukina, Larcker has just published a study on how to discern when a CEO is lying on an earnings call, based on a close examination of the question-and-answer portion of 16,000 calls whose financial statements – and, in some cases, restatements — were then taken into consideration.
Among the study’s findings? That deceptive CEOs tend not to use first person pronouns as much, using “we” and “our team” rather than “I.” They refer to shareholder value less than their more forthright peers, they’re more hyperbolic, using adjectives like “fantastic” versus “good,” and they don’t “um” and “ahh” as much as truthful CEOs.
“We actually thought there would be more of those ‘ums’ because when you’re lying, you’re telling a story,” says Larcker. “But it turns out that if you know you’re going to be asked a question [about which you need to lie], you have a polished, precise answer.”
The study is far from exacting, says Larcker, who calls his model a “first shot.” (The methodology appears to identify lying CEOs with roughly 5% greater accuracy than a random guess.)
“I’d love to bring more demographics into it, slice it up differently,” he says. “It’d be great to get the input of VCs who are meeting with entrepreneurs all the time and for whom a tool [that helps isolate liars] would be very relevant, given the tremendous amount of uncertainty in funding entrepreneurs.”
In the meantime, Larcker thinks he may be on to something.
“You have to believe there’s something systematic that gets reflected in words,” Larcker says. “What we’re banking on is that there’s a lot you can control if you are lying cognitively, including your posture and voice. But you run out of cognitive capacity at some point, and maybe it manifests itself in speech. Maybe speech is the setting where these deceptive cues pop out.”
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Stuart Miller said on October 19, 2010
We deal frequently with private company CEO’s. From our perspective, the most reliable indicator of a CEO’s lying: If we ask a penetrating question about the business, and he/she answers by telling us how many of our competitors are interested in getting hired on the transaction being contemplated (a capital raise or M&A transaction). The “redirect†is a great tell and persuades us to head for the door.
LP said on October 20, 2010
Amateurs. If you want the real deal, then check out BIA (Business Intillegence Advisors). I went through their training not long ago and came away thoroughly impressed. It’s not perfect, but far more scientific and practical than what others (including above) espouse.
Connie said on October 20, 2010
lp, i would *love* to hear about that training session. i’m fascinated with bia but they don’t talk w the press. their media contact person is in place partly to tell reporters not to bother. connie.loizos at thomsonreuters.com. (if you’re amenable.)
LP said on October 25, 2010
Sorry Connie – we have a don’t ask, don’t tell policy with the press as well.