Deception and “Tells” in Business in Poker

Cite this Article
Joshua D. Wright, Deception and “Tells” in Business in Poker, Truth on the Market (August 26, 2010),

The Economist points to a very interesting study by Stanford’s David Larcker and Anastasia Zakolyukina on the use of deception in the business environment (HT: Brian McCann).  The article’s title, “How to Tell When Your Boss is Lying,” gets at the thrust of the piece.  Larcker and Zakolyukina look at conference call transcripts from 2003 and 2007 for evidence of determinants of companies who later ran into problems in the form of serious financial restatements or accounting errors.  Can you identify a CEO or CFO engaging in deceptive conduct during a conference call?  What sort of “tells” would you look for?

Larcker and Zakolyukina find that:

Deceptive bosses … tend to make more references to general knowledge (“as you know…”), and refer less to shareholder value (perhaps to minimise the risk of a lawsuit, the authors hypothesise). They also use fewer “non-extreme positive emotion words”. That is, instead of describing something as “good”, they call it “fantastic”. The aim is to “sound more persuasive” while talking horsefeathers.

When they are lying, bosses avoid the word “I”, opting instead for the third person. They use fewer “hesitation words”, such as “um” and “er”, suggesting that they may have been coached in their deception. As with Mr Skilling’s “asshole”, more frequent use of swear words indicates deception. These results were significant, and arguably would have been even stronger had the authors been able to distinguish between executives who knowingly misled and those who did so unwittingly.

This study should help investors glean valuable new insights from conference calls. Alas, this benefit may diminish over time. The real winners will be public-relations firms, which now know to coach the boss to hesitate more, swear less and avoid excessive expressions of positive emotion. Expect “fantastic” results to become a thing of the past.

Interesting.   Most poker players will tell you that the fundamental story about tells is that “weak means strong” and “strong means weak.”  In Mike Caro’s Book of Poker Tells, this basic rule is extended to verbal tells as well, e.g. a player in poker who asks what the rules are before they raise are usually in a position of strength in the hand.  And there is Caro’s Law of Tells #24: “beware of sighs and sounds of sorrow!”  Or #19 “A forceful or exaggerated bet usually means weakness.”  The basic idea, again, is that sounds indicating strength and optimism indicate weakness and sounds and words indicating weakness mean strength.

It appears that there is at least some common features of the determinants of deception in both settings.   For example, Larcker and Zakolyukina’s findings suggest that CEO’s and CFO’s deception is correlated with extreme positive expressions (strong = weak!), eliminating hesitation words that signal weakness, and increase aggression (see Law #19 again).

I mean, its not quite as interesting as KGB’s Oreo Cookie twisting tell in Rounders, but still, pretty interesting.  Of course, the best way to avoid tells in the business environment, and the poker table, is to keep your demeanor, tone, actions, and play uniform.  It is tough to identify deception (or anything else) without variation.