‘The idea of losing by being wrong is a very important sign of truthfulness, especially in an age of fake and inspired news’ | Photo credit: Getty Images/iStockphoto
During election season, television is filled with election surveys by various pollsters predicting winners, vote shares, and number of seats for political parties. Suppose there are two television channels, A and B, forecasting for a particular election, but channel B makes its prediction successful by using its money. It makes huge profits if its predictions are correct but loses everything if they are wrong. Which polluter can you trust more, A or B? Chances are you can trust Channel B more because its incentives are in line with its predictions. Channel B has ‘skin in the game’, in the words of Lebanese mathematician and philosopher Nassim Taleb, an ethical principle of symmetric incentives and accountability.
an ethical dilemma
Extending this thought experiment, suppose that Channel B’s predictions come true and it makes a significant profit from its bet. Perhaps it is possible that Channel B’s predictions may have influenced some voters to vote in a way that bolstered its predictions. But an election result is dependent on a multitude of different factors. Should the fact that Channel B profited financially from its predictions change your view of the merits of its survey? Would you rather have Channel A’s survey or is Channel B’s ‘skin in the game’ survey preferred, regardless of its profits? The ethical dilemma posed by this thought experiment is at the root of the ongoing Hindenburg Research vs. Adani saga.
Hindenburg, a firm that makes bets in the stock and bond markets, published a massive research report making serious allegations about the business ethics of Adani group companies and manipulation of share price to inflate the price. Hindenburg also made a huge financial bet on the veracity of his report by engaging in ‘short selling’ of Adani shares, which increase when prices fall. Adani’s shares plummeted and Hindenburg apparently committed financial murder.
The Solicitor General of India questioned Hindenburg’s motives in the Supreme Court of India, arguing that its report was a misleading pretext to deliberately depress the share price and make a profit from it. Commentators sympathetic to the Modi government (including a former vice-chairman of NITI Aayog, a former chief economic advisor, a former foreign secretary and many others) have jumped to attack Hindenburg’s intentions, despite the fact that The Hindenburg would have lost a lot of money had it been proven wrong. Ironically, the Hindenburg report alleged that the Adani group had hatched a grand scheme using offshore entities and related parties to manipulate its share price and profit from its rise, which is now being held by the same Adani. is being criticized as a mischievous report to manipulate the shares of Benefit from its fall. This prompts the counterfactual question: Had Hindenburg published the exact same research report without making financial bets, would it have been considered more credible?
There is empirical evidence to show that it may have been Hindenburg’s ‘skin in the game’ approach that helped establish its credibility among market participants. In August 2022, another foreign research firm, CreditSights, published a similar report questioning Adani Group’s governance practices and share valuation. The group responded to those allegations, though without any reference to ‘Jallianwala Bagh’ or the national flag (tapping into nationalism), as it did in response to the Hindenburg Report. The CreditSites report did not create much hue and cry and was dismissed by the stock market as it had no impact on the share price of Adani companies.
In fact, in the past four years there have been at least eight such news or research reports by similar foreign publications (Bloomberg, The Guardian and Morgan Stanley) about alleged questionable business practices and share price movements of the Adani group. None of them had such an impact as the Hindenburg Report. Arguably, this is due to Hindenburg’s willingness to take a financial bet that lent credibility to its findings in comparison to a mere report.
symbol of truth
The idea that one can lose by being wrong is a very important indicator of truthfulness, especially in times of fake and inspired news. Claiming that the Hindenburg Report is one big devious conspiracy to drive down stock prices and profits is akin to claiming that a pollster engineered the outcome of the entire election to ensure that his predictions came true and that economic be beneficially The financial market, like the electoral market, is too complex and multivariate to be manipulated so easily. To be clear, I am not claiming that markets are efficient and ‘inefficient’. If any, they are more wrong than right. But there is a difference between distortions in market structures versus a symmetric incentive structure. It is common practice in financial markets for investors who buy/talk to others in hopes of influencing others to buy these shares and drive up the price. This is considered a legitimate practice and no one pays attention to it. But the perfectly symmetrical idea of shorting a company and ‘short selling’ its shares gives rise to cries of ‘schadenfreude’, which is illogical.
illegality vs immorality
In short, Hindenburg alleged that the Adani Group had illegally inflated its share price in order to obtain profits. Supporters of Adani allege that Hindenburg unethically undervalued his share price in order to make a profit. While the allegation of immorality is baseless, it is important to distinguish between the two, as the Supreme Court will be deliberating on the matter soon. Illegality is profoundly different from immorality. One can have a valid debate as to whether it is morally juster to profit from a fall in a stock price than it is to profit from its rise – but it is the Hindenburg v. Adani case and ‘short selling’ is out of scope.
Taleb believes that the philosophical idea of ’skin in the game’ of symmetrical rewards and punishments is very important for cultivating trust and confidence in societies. Contrary to the argument of Adani’s supporters, Hindenburg’s ‘short sell’ bet signaled confidence and trust in his research and played a key role in exposing Adani’s alleged financial fraud. It was neither illegal nor unethical. If there is a ‘skin in the game’ approach where journalists, scientists and commentators are held accountable for their words and actions, it will help reduce the threat of fake news, ‘hit jobs’ and ‘tyranny of experts’ can be found, and can be increased instead. Believe in society and reduce discord.
Praveen Chakraborty is a political economist and the President of Data Analytics of the Congress Party