Institutionalised mistrust

There's a saying (or perhaps it's a line from a poem) that good fences make good neighbours. This means that when the fence between your neighbours' land and yours is high and strong, then you will get along better with your neighbours. There won't be any grounds for suspecting one's neighbour when things go wrong. What this proverb is saying is that if one builds in the assumption of a certain amount of mistrust, then things actually run better and there's effectively more trust in an interaction. The important thing here is that the mistrust is institutionalised. No one has to make a decision as to whether a particular neighbour is untrustworthy or not. No one has to bear the humiliation of being the only one to be fenced out. 

In this sense, a universal, all-encompassing mistrust is a good basis on which to build honest and confident interactions. I'm sure you know where this is leading to. I think there isn't enough mistrust in the financial industry in India. In the interactions between individuals and companies, we need a lot more mistrust built into the system. And when the system doesn't provide enough mistrust, then we should individually build it into our behaviour.

This institutionalised mistrust should work by recognising a basic truth-that individuals and businesses will always work in their own interest, and not of anyone else's. When their own self-interest happens to be aligned with their customers', then they'll work in the customers' interest too. However, there's no chance that anyone is going to work in the interest of any third party. This is the natural order of things, this is the way things have always been, and if you act as if this is not true, then as a customer, you are going to get burned.

Let’s take IPO pricing, for example. Why on earth should anyone expect promoters or their advisors not to extract every last rupee from investors that they think the market will bear? Why should they leave anything on the table? As investors, that's the assumption one should start with and make decisions accordingly. Apply the same principle to other financial interactions. Dealing with a bank? A stockbroker? A mutual fund salesman? An insurance agent? A credit card issuer? If you are making any decision based on information provided by the other party, then it's safe to assume that the information will be tailored to maximise their interest and not yours. I know the theory is that their interests are aligned with their customers, but that's just the theory; it doesn't happen in practice. As the legendary investor Warren Buffett said, "Never ask a barber if you need a haircut."

But those are the fences you can build as an individual. At a broader level, we probably don't have enough mistrust built into our system. There are a lot of unstated assumptions that market mechanisms will take care of those who abuse customers/investors. I don't think this is working as well as it should. Such a mechanism works in the long term. In a growing economy, there's plenty of room for taking, successively taking new waves of customers and investors to the cleaners, and not having to worry about the long-term.

Also read: At financial summits, every speaker is selling something