Is Benford’s law really less true now than ever?

Jialan Wang, an assistant professor of finance at Washington University, has posted a fascinating note about the observable departure from Benford’s law over time. I am trying to imagine any other explanation of this other than widespread fraud (or as she puts it more tactfully, “decreased reliability of accounting data).

Please chime in with your own alternate explanations in the comments.

One thought on “Is Benford’s law really less true now than ever?

  1. leonardsmale says:

    Many things in nature like to grow or change exponentially. However, they cannot continue to do that forever because of higher level constraints that eventually kick in.
    This creates a change in behavior that can be quite sudden – a singularity if viewed from far enough away.
    A common way of describing this is that “trees do not grow to the sky”.
    So, when observing such growth, it will start by following Benford’s Law, but as you approach a fundamental change in behavior you would notice that Benford’s law no longer applies so well. The major point that the article makes for finances, I can agree with.
    It’s quite a leap to think there is some sort of mass fraud by companies going on.

    Typical USA companies post earnings reports that factor in future earnings predictions. A sort of forward booking that suddenly hits their bottom line when they cease to grow. This is not regarded as fraud, (wish it was), and not all companies do it. It’s stupid because it tends to replace planning with hope in corporate thinking.

    So, my explanation is that if it is starting to apply generically to companies then we are approaching the point where the growth is being limited for some reason.
    More likely showing that the glut of fiat money is finally becoming visible beyond creating bubbles that move around finance sectors.
    Or that we are running out of oil per person.
    Or that the Chinese quietly buying up real world resources with overvalued USA dollars is giving them such a competitive advantage that it is starting to show in USA company bottom lines.
    Whatever it is, I’m sure the economists will be able to expound upon it with far greater insight after the singularity has happened.

    By the way, Microsoft did not factor in future growth in its accounting practices. Clearly its stock price could not go up forever, yet when I asked the top Microsoft executives during the growth what their plans were for managing their part of the company when the stock flattened out they were nonplussed.
    However, if you look beyond the obvious numbers, the consequences of the .com bubble was managed extremely well by majority owners of some public tech companies to make them massive personal profits (details not provided, for obvious reasons). They just didn’t align their personal fortunes with those of the companies they were running. So, “following the money” gives greater insight than Benford’s law, I think. The movement of real assets is increasingly well hidden by many layers of obfuscation not available to economists and not watched by government oversight bodies. None of this means that the companies and their accountants are engaged in fraud.

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