Blurber Quid Pro Quos

After the dot-com bubble, people were shocked to find that Investment Banks often promoted stocks to their clients while simultaneously seeking business from these companies, often in a quid-pro-quo. Analysts such as Henry Blodget of Merrill Lynch, Jack Grubman of Citi, Mary Meeker of Morgan Stanley, and Frank Quattrone of Credit Suisse First Boston were considered perspicacious gurus of the 'new economy' back in 2000 (Meeker still works as an analyst!). In fact, they were in indiscriminate shills for their corporate bankers, who would reap big fees on new equity or debt issues. Their signal-to-noise ratio was actually negative. But they wrote in a way readers appreciated, so like giving whiskey to Indians, they could merely say they were filling a need.

The SEC has adopted new rules and now full disclosure is required, along with a separation between research and investment banking, and a prohibition against analyst compensation based on investment banking business.

But most of business, if not life, is about doing people favors. Very few major business transactions are one-off, but rather, part of a relationship.

I recently wrote a book, and remember that the first question my editor had was whether I knew someone famous to blurb my book. Unfortunately, I didn't. My eventual blurbers were not nobodies (Todd Houge, Kevin Blakely, Don van Deventer), but their q-scores are not off the charts. There isn't much of a quid pro quo if only because I am not in a position to help these guys very much, though the fact they knew me was probably essential in their willingness to read my book (surely an imposition one simply cannot grant to anyone, having finite time).

Anyway, knowing how important blurbing is to selling books, I now often read the blurbs, and find them often transparently compromised. That is, 90% of the time the blurbers are close colleagues, mentioned positively in the book, or otherwise interested in the positive fortunes of the author and the book. For example, Tyler Cowen has a new book coming out, and he referenced two rather glowing reviews, one by Tim Hartford, the other by Ben Casnocha. For Hartford's 2008 book The Logic of Life, Tyler blurbed:

This witty, intelligent book will help you see the entire world in a new light.

In the New York Times, Tyler wrote a glowing review of Ben Casnocha's 2007 book, My Start-Up Life.

Payback? I'm sure they will say their unqualified, over-the-top admiration for each other is sincere, after all praise to those who have done, or may do, a great favor for you comes naturally. But back in the 1990's every stock analyst would regularly insist that their recommendations came from bottom-up due diligence and an uncompromising evalution of the big picture. It is what economists call 'cheap talk', because it costs nothing in reputation, money, or cognitive dissonance, to insincerely say one is sincere, making the declaration meaningless.

Considering the fact that most books are bad (Sturgeon's Law), you should only put credence in a venue where their average review is negative. If you have never read at least two negative reviews from someone, you should dismiss their positive reviews. Richard Posner and Bob Solow are good reviewers, in my opinion.

But what about the shady, crooked business of quid-pro-quos? I don't know, but it's endemic. I once mentioned to a prominent risk website I have a free default model online, and whether I could mention it in a discussion post on his site. He mentioned that his other advertisers who actually sell such services would not appreciate this, so I could either buy space, or post on various topics for free for a couple weeks and ask him again later.

Clearly this kind of thinking implies that his advertisers are probably not subject to the same whithering criticism given to, say, bureaucrats, various academics, or those not advertising on his site. This same well-known quant is outraged that ratings agencies have a conflict of interest with those they rate, and probably thinks his situation is different. As they say, it's good to be reasonable, because then you can come up with a reason for everything you do.

It's hard to get too worked up about these situations. People shade their public opinions based on how it relates to their bigger picture. I don't begrudge those giving tendentious support for those doing them favors. It's my responsibility to evaluate everything, including evaluations of third party evaluators.