I’ll talk about finest today maybe more
than most of you are hoping for but when
I was young professor of Finance was not
a mind warp most one at least now I was
much more fascinated by sports any sport
really but let me show you one sport
that I found really cool but I was
really bad so my wrestling well for
obvious reasons I was never going to be
very successful but sumo wrestling is a
fascinating sport it has a tradition of
over a thousand years and there’s a lot
of ritual and honor in the sport so if
you would ever watch a game you would
see that before the match sumo wrestlers
throw salt to purify the ring to get rid
of evil on the ground and the daily
lives of sumo wrestlers still follow
strict addition so this is really a
sport with a lot of honor and ritual
well my topic today is academic
crime-scene investigation and even in
the honorable sports such as sumo
wrestling there were rumors of
match-fixing of wrestlers purposely
losing matches well this is not easy to
prove it turned out there was academic
professors who made the attempt Mark
Duggan and Steven Levitt they looked at
potential fraud in sumo wrestling and I
did this by looking at large data sets
so before I’ll move to my own field if
you’re financed let me talk you through
what they did in the world of sumo
wrestling they had loot huge set of data
over ten years of data over 30,000
fights and I could see the match
outcomes and this is what they used so
they didn’t question wrestlers they
didn’t go to matches or they looked at
data in sumo wrestling in a tournament
every wrestler fights 15 times and the
eighth win is the most important so sure
the more you win the better but the
eighth win is four times more important
for your for their salary for their
status so if there’s any fraud you would
think well some new comes up for the
eighth win
maybe bribe somebody who already has
more than eight wins to beat him yeah
and that is what they found so many
coming up for the eighth win was much
more likely to win than you would
otherwise
and this was especially the case when
the wrestlers knew each other well when
they fought each other more often in the
past so collusion might have been easier
and what’s really cool is the next time
these wrestlers meet it was the other
guy who was more more likely to win some
repayment some payment in kind and all
these parents disappeared whenever
rumors in the popular media so they show
their estrade in sumo wrestling I can
tell you’re not so surprised because yes
we know there’s fraud in sports
I notice there plenty of examples but I
think the cool thing here is that you
can show there is fraud just by looking
at large data sets right without seeing
potential bribes that are being paid
authorities could then follow up so in
the sumo wrestling example the police
investigators started investigating
cellphone text messages and indeed they
found suspicious match messages
indicating that messages were being sold
and later several wrestlers admitted to
to fraud so now it comes we should do
the same in the world of finance in
finance we are drowning in beta we have
such a lot of data right
we know the profits of companies we know
how they’re financed you can track stock
price at any point in time you can find
press releases the information out there
is huge and it’s getting better and
better with increasing level of details
so in finance we’re drowning in in data
but we’re starving for wisdom the
financial bill has a really poor
reputation how do I know this well we
asked people you can do a survey asking
people how to rank all the different
industries in an economy based from best
reputation to worst reputation or
recently finance is typically at the
bottom also mr. Becker it’s a lack of
industry but then finance is really
close to being at the bottom social
media tells the same story if you look
at tweets it turns out that almost 90%
of those tweets of our banks are
negative so the financial world has a
problem with trust and this is
troublesome in a way over
selling in finance is is trust are you
invest in a stock for the promise of
getting a future return so if people
don’t trust financial markets they stop
investing in financial markets which
means it’s much harder for companies to
get financing which means there’s less
investment there’s less innovation
there’s less employment lower economic
growth so this stuff is important to us
all so I’m professor of Finance I study
numbers a lot of numbers big financial
data and I can tell you you’re starting
to feel sorry for me about how boring my
life is but I’m here to tell you that is
actually crucial it’s vital that
somebody looks at these big financial
they’re one big problem in the financial
world is insider trading insider trading
we really reduces trust in financial
markets and this is something I’ve
looked at so in insider trading it’s
somebody with private information
trading on this to make a profit right
if the privileged few making a profit at
the expense of the outsiders of ordinary
investors I think this has sparked a
popular outrage about the excesses of
Wall Street it’s one of the most common
white-collar crime these days so instead
of trading problematic
what if finance professors could reduce
insider trading well I think we can I
just as you can study some fraud in sumo
wrestling by looking at a large set of
data you can do the same with insider
trading looking at a lot of information
I people might lie but these beta they
tell the truth so let me show you a
graph from study that I’ve done with two
co-authors and we we look at insider
trading so I’ll show you the trading
pattern later in a second but what the
graph currently shows on the horizontal
axis is the number of days compared to
the announcement day so they 0 is an
announcement day when news comes out 10
means 10 days after the announcement
minus 10 means 10 days before the
announcement so insider trading is
you’re the boss of a big company and
there’s been a disaster in one of your
factories I watch it but you should do
them it’s announced there’s been a
disaster and then you can trade in your
own stock that’s fine what is not
allowed it’s a first sell all your stock
and then disclose there’s been a
disaster in one of your factories all
right what we look at it’s short
interest around the announcement for
private placement be comfortable issues
in the United States so it’s not about
disasters but the idea is the same it’s
allowed to trade afterwards it’s not
allowed to trade before they zero so
what do we see when the short interest
go up well there’s a pretty big increase
about four days before the announcement
so clearly before it’s legal to trade we
do see there’s a lot of trading there’s
much more information in the study that
I have time for to tell you so you sort
of have to trust me there let me show
you this is insider trading and for
example we show that this pattern is
much stronger when we know if more
people have inside information and we
also know that these people that trade
before the announcement are not simply
guessing no they’re making huge profits
they know the type of information that
comes out later so this is forensic
finance and I think these studies
matters for regulators for example
finance academics we’re good at looking
at large data sets it’s what we’re
trained to do now this is harder for
regulators who often claimed to be
understaffed underfunded finance
academics I can do a careful structured
analysis of big financial data
controlling for a lot of other factors
and ruling out all kinds of alternative
explanations right before we draw
conclusions and here we can show
regulators and prosecutors where to look
in which markets around which
transactions is their suspicious
behavior but in our case this is when
there’s a lot of insiders involved and
really large negative announcement
to be clear I don’t think we should use
general data to accuse particular people
of committing fraud we really have to
work together with regulators and
prosecutors that we can tell them where
to look
on which transactions which markets and
they can follow up just as what happened
in the sumo-wrestling example it’s about
sunlight is often said to be the best
disinfectant and this is highly relevant
here
we need sunlight we need to shine some
light on the financial world if people
know that they’re being watched the
problem might already reduce right if
people know that forensic finance is a
big thing the people who are thinking of
committing financial fraud might be
framed from doing so so we can make
markets fairer just by knowing as
forensic finance is a big thing for me
forensic science really provides an
opportunity to do research about things
that people care about so let’s have
finance academics help ID regulators
let’s make markets fair and let’s
increase the trust in the financial world thank you
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