January 19, 2010
LISTEN: mp3 audio (6:46 min)
Every subculture has its own special lingo, including acronyms. Baseball fans know the importance of RBI, OPS and ERA. Car nuts understand RPMs and HP. The military is full of acronyms, including dangerous things like IEDs and RPGs. And governments are big users of acronyms, too, from agencies (FBI, CIA) to legislation (ERISA, TARP). The President of The United States even has his own acronym – POTUS.
With its vast array of products, the lingo of the financial world is tailor-made for acronyms. In fact, the list of financial acronyms stretches from ARMs to ZEBRAs (adjustable rate mortgages to zero-based risk swaps), with every letter in-between represented. In theory, financial acronyms give people a shorthand method for comprehending or communicating larger ideas; if you know the specifics contained in IRAs and 401(k)s, discussing the comparative features can be much more efficient.
But according to Jason Zweig, author of “The Little Book of Safe Money” (Wiley, 2010), financial acronyms can have a dark side, because the shorthand convenience of acronyms can be used to manipulate financial consumers. Zweig calls “these products of financial engineering ‘WACronyms,’ (short for “Wall Street acronyms”) because they tend to sound innocent when, in fact, many of them are full of wacky complications and incomprehensible risks.”
Psychologists have found that the human mind responds to acronyms because they provide what is known as “fluency,” making information more recognizable and easy to digest. And in general, our tendency is to prefer familiar or easily processed ideas over unusual or complex ones.
Numerous psychological studies have shown that a name or title can exert great influence over our perceptions. In particular, Zweig says, “the easier something is to perceive, remember or pronounce, the safer it will make us feel—regardless of its actual risk or benefit.” It’s for this reason that a drug officially known as …
1-[[3-(6,7-dihydro-1-methyl-7-oxo-3-propyl-1Hpyrazolo[4,3-d]pyrimidin-5-yl)-4-ethoxyphenyl]sulfonyl]-4-methylpiperazine citrate
…is given the name “Viagra.” Not only is it easier to pronounce the first time we hear or see it, but with its “hints of life and vigor and waterfalls,” the product makes a distinct connection to things with which we are already familiar.
Thus, acronyms can become a form of marketing. It is Zweig’s contention that “investment bankers put a great deal of energy and effort into coming up with product names that can somehow be reduced to a catchy WACronym—because Wall Street knows that a fluent name automatically makes investors more comfortable with risks they do not understand.”
As an example, Zweig cites the WACronym CMO:
“Collateralized mortgage obligations” is an intimidating 11-syllable mouthful that sounds like something a debt-collection agency might try extracting from you while an ex-wrestler … dislocates your thumbs. A “CMO,” on the other hand, sounds short, cool, snappy and familiar, like a fast-food restaurant, a sports statistic, a videogame, a type of sneaker, a new-model car. You would never guess that by late 2008, some CMOs were worth only a tiny fraction of the original prices at which Wall Street foisted them onto “sophisticated investors.”
In any sub-culture, knowing the lingo (including the acronyms) marks you as an insider. There is a certain “cool factor” in knowing the phrases, using the jargon. No doubt some investors, even very intelligent ones, have been swayed by catchy WACronyms. But this information doesn’t mean all WACronyms are bad deals for consumers. And it also doesn’t mean that most people should stick to simple financial products, because some complex financial products can have a legitimate place in even the most conservative investor’s portfolio. It just means you should be aware of the psychological factors and marketing strategies at work below the surface.
Zweig’s recommended response to WACronyms is simple: “Ask what the WACronym stands for. If you can neither pronounce nor understand the terms the abbreviation stands for, don’t invest in it.” Hey, that’s common sense: You shouldn’t buy something you don’t understand, whether it comes with or without a WACronym.
Filed Under: CONTROL, SEE, THINK | Leave a Comment
Ready to TAKE AIM AT AcceleratING Your Prosperity?
Learn how by grabbing our complimentary Prosperity Accelerator Pack - a short overview of an approach aimed at accelerating your prosperity – with less worry, uncertainty, and stress.
When you get your complimentary Prosperity Accelerator Pack, you'll also get a FREE subscription to our Prosperity On Purpose ezine as our thanks!
Your contact information is safe with us. Click here for our Privacy Policy.
Leave a Reply