The real pitfalls arise when bad financial products are marketed as good ones, and investors fail to recognise the deceit

Threat of bad advice: A more crucial aspect of financial literacy is not just what to do with money, but also what not to do with it If you are saving and investing, encountering such schemes is inevitable; its not an exception, but certainty. Thus, a more crucial aspect of financial literacy is not just what to do with money, but also what not to do with it

Dhirendra Kumar

Dhirendra Kumar


CEO, Value Research
The amount of energy needed to refute bull**** is an order of magnitude bigger than that needed to produce it. This is Brandolini’s law, or the Bull**** asymmetry principle. It highlights a significant challenge in our digital age. Coined in 2013 by an Italian programmer, Alberto Brandolini, the principle emphasises the immense effort required to debunk nonsense, compared to the effortless ease with which it is created and spread.

Brandolini formulated this insight after reading Daniel Kahneman’s book, Thinking, Fast and Slow, and watching a heated political debate on Italian TV. Having watched many TV debates in India, I fully sympathise with Brandolini. The nonsense does tend to flow freely in political debates on TV. However, that’s not what I want to discuss.

Apart from TV, the rise of social media and its army of finfluencers have made this principle more relevant than ever. These influencers often peddle bad personal finance advice with little accountability, leading many to make poor financial decisions based on dubious recommendations. In investing, the problem is exacerbated by an industry that actively encourages people to deceive themselves. This issue has become so pervasive that Sebi is starting to take serious action against it.

However, the problem looks very different from the perspective of regulators, compared to that of individual investors. From a regulatory standpoint, the focus is ensuring that anyone providing financial advice is properly regulated. However, for individual investors, regulation alone does not guarantee safety. We have all encountered bad, self-serving advice from regulated intermediaries. Whether this advice comes from a YouTube finfluencer or a bank’s relationship manager, the damage to the investor is the same.

Therefore, it’s practical to set aside the notion that only unregulated sources provide poor advice. Instead, we should develop a personal methodology for recognising and ig-noring bad advice, regardless of the source. By learning to identify and disregard poor financial guidance, we equip ourselves with a valuable skill, much like teaching someone to fish, rather than giving them a fish. This approach will serve us well, whether the advice comes from an online influencer or a certified financial professional.

This shifts the focus to investor education, often referred to as financial literacy. It’s clear that protecting investors is impossible if they lack the knowledge and willingness to be protected. Therefore, most people need basic financial literacy, which is commonly understood as knowing what to do with money. This includes understanding how the investment world works, the different types of investments, their suitability, and how to incorporate these into one’s financial plans. While this foundational knowledge is essential, it’s not where most people make serious mistakes.

The real pitfalls arise when bad financial products are marketed as good ones, and investors fail to recognise the deceit. If you are saving and investing, encountering such schemes is inevitable; it’s not an exception, but certainty. Sooner or later, everyone faces the experience of being sold harmful financial products. Thus, a more crucial aspect of financial literacy is not just what to do with money, but also what not to do with it. Unfortunately, this type of education is rarely available and is often learned through bitter experience.

Adding to the complexity, the pervasive nature of these harmful financial products means that even savvy investors can sometimes fall prey to sophisticated schemes. The hard fact is that there is no foolproof solution. Some bad products are recognisable easily, some are harder to figure out, and some impossible without a lot of experience, and by being generally sceptical of anything new.

Still, stringent regulatory action is essential. Without the real threat of consequences, including publicly visible punitive measures against violators, the unchecked spread of finfluencing will continue. To get a sense of the outrageous financial advice being disseminated, try opening YouTube in an incognito window of your browser and searching for something as simple as ‘best stocks to buy’. For seasoned investors, this might be amusing, but for novices, it can be dangerously misleading.

(The author is CEO, VALUE RESEARCH)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances