The Greatest Fraud the World Has Ever Known: Self-Deception (Business and Economics Book 1)

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Articles

  1. The Risks and Rewards of Penny Stocks
  2. What markets and government do for us
  3. Milton Friedman on Corporate Social Responsibility | The Lucid Manager

Pump-and-Dump Schemes. Short-and-Distort Scams. Reverse Merger Deceptions. Mining Scams. The Guru Scam. Offshore Rackets. How to Avoid Scams. Promotion vs. Grade the Quality of Management. Evaluate the Financials. Know the Quality of Disclosure. Is the Business Plan Achievable? How to Buy Penny Stocks. Using an Online Broker. Buyer Beware. Limit your holdings and diversify. You might be excited about the prospects for your favorite penny stock, but you still need to protect yourself.

Site Index

Check liquidity and trading volumes. Even if you've made a successful investment in a penny stock, you're going to need to be able to sell your shares. You should have adequate liquidity and trading volumes in the stock so that you can trade it efficiently. Know when to sell. It's very rare for a penny stock to be a long-term buy-and-hold investment.

The sector is built on short-term trades, so it's as important to know when to sell as it is when to buy. If you notch sizeable gains over a short period in a penny stock, consider booking them now rather than waiting for bigger profits that may never materialize. Search for high-quality stocks. Basically, some penny stock companies are worth more than others. Good prospects include ventures that are set up by experienced managers who have successfully exited a previous company; stocks with binomial outcomes such as biotechnology stocks or promising resource companies and fallen angels. If getting a low stock price is driving your investment decision, then fallen angels — which appear in abundance towards the end of a bearish trend, whether in a specific sector or the overall market — are among your best bets although strictly speaking, they're not really penny stocks.

Note: this story was compiled with reports from Leah Zitter and Elvis Picardo. Compare Investment Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Articles. Partner Links.

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The Risks and Rewards of Penny Stocks

Pink sheet companies are not usually listed on a major exchange. These securities do not meet the requirements to have a listing on a standard market exchange. Unlisted Security Definition An unlisted security is a financial instrument that is not traded on a formal exchange because it does not meet listing requirements. Enron stockholders are an example.

The rise of Enron was based on the adoption of misleading and then later, fraudulent accounting. The more usual practice is to wait until the profits are actually realized. Fortune was right; its editors just failed to understand the nature of the innovations. Whether or not businessmen have good or bad morals is not the subject of this essay, although sometimes both of these sides will appear.

Instead, we see the basic problem as pressures for less than scrupulous behavior that is incentivized in competitive markets. They are terrific at incentivizing and rewarding businessmen heroes with innovative new products for which there is real need. Because of competitive pressures, managers who restrain themselves in this way tend to be replaced by others with fewer moral qualms.

Civil society and social norms do place some brakes on such phishing; but in the resulting market equilibrium, if there is an opportunity to phish, even firms guided by those with real moral integrity will usually have to do so in order to compete and survive. Who are Bob and George, they will ask, to say that individual people are not themselves— always and invariably— the best arbiters of the decisions that affect them?

Like a great deal of economics, this argument makes sense in the abstract. But when we examine this question as it describes real people making real decisions, we find that to a remarkable extent they are phished for phools: and, in consequence, they are making decisions that, applying just a bit of their own common sense, they would know are not to their benefit. We do not have to be presumptuous to see that people are making such decisions. Just think about poor Mollie in Vegas. In each of these four areas we shall see that phishing for phools has significant impact on our lives.

Personal Financial Insecurity. A fundamental fact of economic life has never made it into the economics textbooks. Most adults, even in rich countries, go to bed at night worried about how to pay the bills. Economists think that it is easy for people to spend according to a budget.

And businesses are keenly aware of those 1-percent moments. They target the events in our lives when love or other motivations trumps our budgetary caution.

The Psychology of Deception and Fraud in Trading

For some, this is an annual Christmas potlatch. But rites of passage are not the only life punctuations where sticking to budget is presented as being mean. It is thus no coincidence that, as rich as we are in the United States, for example, relative to all previous history, most adults still go to bed worried about their bills. Producers have been just as inventive in getting us to feel we need what is produced as they have been in filling the needs that we really have.

No one wants to go to bed at night worried about the bills. Yet most people do. One source of our angst about those bills comes from rip-offs: as consumers we are especially prone to pay too much when we step outside of our comfort zone to make the rare, expensive purchase. In some 30 percent of home sales to new buyers, total— buyer plus seller— transaction costs, remarkably, are more than half of the down payment that the buyer puts into the deal. Auto salesmen, as we shall see, have developed their own elaborate techniques to sell us more car than we really want; and also to get us to pay too much.

Nobody wants to be ripped off. Yet we are, even in the most carefully considered purchases of our lives. Financial and Macroeconomic Instability.

What markets and government do for us

Phishing for phools in financial markets is the leading cause of the financial crises that lead to the deepest recessions. Yes, every time it is different: the stories are different; the entrepreneurs are different; their offerings are different. But, also, every time it is the same. There are the phishermen; there are the phools.

The investment managers who purchased the packages with the bad mortgages in the buildup to the crash could not possibly have wanted them. And then, painfully, when the phish was revealed, terrible side effects occurred: confidence was lost throughout the economy; stock prices halved; employed lost their jobs; and the unemployed could not find them.

Long-term unemployment reached levels not seen since the Great Depression. Even regarding health, which is probably the strongest need for those of us who are already well fed, well clothed, and adequately housed, the purveyors of medicines phish us for phools. Advice taken.


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Today the Pharmaceuticals can no longer just add a disease to a list. In the United States, they must run two gauntlets.

Milton Friedman on Corporate Social Responsibility | The Lucid Manager

They must obtain the approval of the Food and Drug Administration, which requires randomized controlled testing; they must also convince the doctors to prescribe their pills. But they also have more than a century of learning how to get past these barriers. Some drugs that successfully run both gauntlets are no more than marginally beneficial. Worse, a few are genuinely harmful, such as Vioxx an anti-inflammatory like Aleve and hormone replacement therapy.

No one wants bad medicine. The effects on health go far beyond bad medicine. Consider phood and its consequences. About 69 percent of American adults are overweight; and more than half of them 36 percent of Americans are, furthermore, obese. A cohort study of more than , gives a surprisingly precise picture. The interviewees, who were mainly registered nurses, were followed up at four-year intervals, from the late s through The average four-year gain was 3. He took the Kantian view that directors must look after the interests of shareholders, which seek wealth maximisation.

As socially responsible activities, in the opinion of Friedman, reduce wealth, companies should not engage in any charitable activities. The socio-economic view claims that companies should maximise the good for the greatest number of people. Following a utilitarian strand of thought, this view holds that companies should engage in socially responsible actions because it maximises the wealth of all stakeholders. However, to ensure that financial sustainability of the corporation is not eroded, deontic constraints that recognise the right of shareholders to a reasonable return, need to be put in place.

In conclusion, directors do not have total freedom to maximise profit as they have to act within both the legal and ethical rules of the game. Furthermore, for companies to be genuinely ethical, they should engage in a reasonable level of socially responsible activities as this maximises the wealth of all stakeholders. This fails to understand what was being said. He does not advocate ignoring charitable work or engaging in ethical behavior, he is saying that the reason for such actions are different than you or I might engage in these sorts of behavior.

You are correct that Friedman places limitations on the behaviour of managers by appealing to ethical standards. But he refers to these only in the context of fraud. The argument raised here relates to whether corporations should actively invest in activities that promote the social good. Friedman says no, the marketers says yes. Investing in social good is an investment in corporate image and potential a profit-maximising activity.

Also, at the time Friedman believed giving was the responsibility of the owners not corporations. Like Adam Smith before him, the famous example of butcher, baker, and candlestick maker bring about good to society by pursuing their own ends. The unseen hand behind the market efficiently distributes goods at the best price. From that quote, I cannot conclude that it encompasses treating people ethically. This quote equates the rules of the game with open and free competition without deception and fraud. All these aspects are covered in law. An example from Australia: supermarkets have forced farmers to sell milk below cost price as they use their market power to demand low prices.

Fully legal, but unethical because it undermines a whole industry and destroys farming communities. The invisible hand is a great model that works fine when all market forces are balanced. In reality, all business strategy literature teaches managers is to manipulate these forces to maximise profit. There are very few markets that are fully balanced because the forces are distorted by corporate intervention.

As Friedman said — corporations, governments, nations cannot be moral or immoral.