The madness of crowds 

The inestimable Douglas Murray has a new book out shortly with this title, and he is not the first author to use this idea.  In 1841, the Scottish journalist Charles Mackay published his slightly less snappily titled 'Extraordinary Popular Delusions and the Madness of Crowds', which wrestled with such perplexing conundrums as the South Sea Bubble.  Despite the passage of time, it's actually quite an entertaining read.

And you get the idea.  Just because a collective group of human beings come up with an idea, or agree on something, that is not some magical guarantee of the 'rightness' or sanity of that decision.  Crowds are composed of individuals, and the individuals are not always quite as rational as they like others to think.  Just being 'in the majority' on a particular viewpoint or ideology is not some short-cut to a great outcome - George Orwell described what that could look like in his prophetic novel 1984.  And here we are!

It's a good idea for clever human beings to remind themselves of these things, when they get together to come up with some new kind of clever financial product.  Richard Bookstaber has written pertinently on this theme in his excellent book 'A Demon of Our Own Design'.  It's still available (and affordable) on Amazon, and I would recommend it to anyone who would value a short jolt of reality, if they feel themselves succumbing to the semi-plausible assurances trotted out by product-providers who excel in the field of highly-complex financial products.  Consistent experience over many years has confirmed the same principle time and time again:  the more complexity built into products and their supporting systems, the higher the probability that someone has missed something critical, and the increased likelihood is that something will go wrong.  Although the financial marketplace often seems to be suffering from a kind of collective amnesia, the Credit Crunch did actually happen, and we are all still living with the consequences.  And that was fuelled by the banks selling hyper-engineered financial products that nobody fully understood at the time.

And, we think, it is happening again.  ValidPath has commissioned some technical analysis of one example of the latest fad for 'cash management services'.  As we discovered, not everything was quite as we might have expected, given the labelling on the tin, and with these kinds of product, that's a very relevant discovery.  Whilst other intermediary firms and networks are jumping in, feet-first, without asking any of the necessary questions, we've gone about this very differently.

ValidPath Members can find out more by clicking here.  This newly-published guidance is part of a growing library of case-studies which should help influence your approach to this challenging area.  You can also read about our due-diligence service in relation to complex investment products by clicking here.
 

Kevin Moss, 30/08/2019