How is the Illusion Created in Financial Market?

One day three friends went to the hotel for having tea and snacks. After having tea and snacks, the waiter gave him a bill of ₹ 100/-. Which was paid in cash. But the cashier found a mistake of ₹ 5 / – in the total bill at the cash counter, so he rectified the bill and returned it to the waiter. The waiter thought about how three friends would divide ₹5/- equally, so he kept ₹2/- with him and returned ₹3/-.

The quiz is starting now,

A simple but tricky puzzle.

A woman buys ₹ 350 worth of household items from a shopkeeper and gives him a ₹ 2000 note. The shopkeeper brings changes from another shop and returns ₹ 1650 to the lady after keeping ₹350 with him. Here a simple consideration is the shopkeeper is selling them at no profit, no loss. Later another shopkeeper comes to him with the same 2000 note and extracts 2000 rupees from him as fake.

Now tell me How much loss the shopkeeper suffered?

A. 350

B. 1650

C. 2350

D. 3650

E. 4000

F. if there is any other, then write.

In #Financial #Presentations, there might be so many gimmicks. We have to understand the presentation properly. Never read the infographics by the tagline. The matter might be something else. Refer to our blog articles, “How to read #Information?” in Part 1 and Part 2.

See how the data has been formulated for showing whatever they want to show. Always try to see the matter which is kept hidden. We will discuss In future Blog Articles, the topic of “What is a better Lump sum or #SIP?“

In another example, we can see how volatility is taken for granted while marketing. Let us check how it hurts your portfolio. You have been told so many times, that ultimately you are getting 10% in all scenarios. Is it true? Let us check it.

We can see that if volatility is not taken care of, it can cause significant damage to the portfolio. Higher the Volatility Lowers the Returns. In future Blog Articles, we will cover this topic #Volatility is your friend or foe.

“The essence of lying is in deception, not in words.”

— John Ruskin

 

Let us see the real example of 2008, how the #illusion was created in the financial world and how it hurt the market. Whenever the bubble is formed by the origin of illusion, it results in financial disaster. Another example is Japan’s 1982-89 bull market in the stock market and the housing sector. In both sectors, the peak of that day is still not recovered after 32 years. #LEHMAN’S #ILLUSION In the Lehman Brothers case, the company used “accounting gymnastics” to manipulate the company’s financial statements during the 2005-2008 financial meltdown — the most devastating since the Great Depression. In 2008, Lehman Brothers’ shaky balance sheet and falling profits left the firm in dire financial peril. It desperately needed to create the illusion that it was healthier than it was.

Lehman used what appeared to be a normal financial instrument in the banking world — a repurchase agreement (a repo) — to book billions of dollars of transactions. A repurchase agreement is a form of short-term borrowing for banks and other dealers typically using government securities. The bank sells the government securities to an investor, in general to another bank, on an overnight basis and buys back the following day. In Lehman’s case, the company did it to exploit an accounting rule, meant to give principled guidance to determine when a repo was a true short-term financing method versus a sale of a financial instrument. The latter desired treatment as a “sale” allowed Lehman to slyly portray its financial condition as rosy when it wasn’t. Lehman significantly executed repo transactions with counterparties on off-market terms, providing a significant amount of game-changing information (not on the page). Combined with the other traditional pieces of information, this ultimately exposed #Lehman’sIllusion.

In Financial Illusions

“It’s not what’s on the page that matters; it’s what’s not on the page that matters.”

 

FINAL WORDS

Our financial system is driven by a huge marketing machine in which the interests of sellers are directly in conflict with the interests of buyers. The sellers, having (as ever) the information advantage, nearly always win.