The Stockholm Syndrome and the Market


"In 1973, four Swedes were held captive in a bank vault for six days during a robbery. Even though the captives themselves were not able to explain it, they displayed a strange association with their captors, identifying with them while fearing those who sought to end their captivity. In some cases they later testified on behalf of or raised money for the legal defense of their captors… …This phenomenon has been dubbed the Stockholm syndrome. According to the theory of psychologists, the abused seem to bond to their abusers as a means to endure abuse."

 -Psychological Responses to Terrorism by Rev. Fr. Charles T. Brusca

Since March 2000, many investors have found themselves victims of abuse. This April ten of the nation's top investment firms settled enforcement actions involving conflicts of interest between research and investment banking. The enforcement actions allege that, from approximately mid-1999 through mid-2001 or later, all of the firms allowed inappropriate influence by investment banking over research analysts, thereby creating conflicts of interest.

The ten firms are a who's who of brokerage and investment banking: Bear, Stearns & Co. Inc.; Credit Suisse First Boston LLC; Goldman, Sachs & Co.; Lehman Brothers Inc. ; J.P. Morgan Securities Inc. ; Merrill Lynch, Pierce, Fenner & Smith, Incorporated; Morgan Stanley & Co. Incorporated; Citigroup Global Markets Inc. f/k/a Salomon Smith Barney Inc.; UBS Warburg LLC; U.S. Bancorp Piper Jaffray Inc.

Charges included:

  • Issuing fraudulent research reports
  • Research reports without a sound basis for evaluating facts, containing exaggerated or unwarranted claims about the covered companies
  • Receiving payments for research without disclosing such payments and making undisclosed payments for research
  • Inappropriate spinning of "hot" Initial Public Offering (IPO) allocations in violation of Self Regulatory Organization rules
  • Violating broker-dealer record-keeping provisions

Curiously, however, investors do not blame brokerage firms for poor performance in recommended stocks. The Stockholm Syndrome gives us insight. According to Brusca:

"With this syndrome the captive seeks to distance himself emotionally from the situation by denial that it is actually taking place. The captive perceives it as "make believe", or looses himself in excessive periods of sleep, or in delusions of being magically rescued. He may try to forget the situation by engaging in useless but time consuming "busy work". Depending on his degree of identification with the captor he may deny that the captor is at fault, holding that the would-be rescuers are really to blame for his situation. "

Are you hurrying to rush to the defense of your broker? Perhaps it was just all a bad dream? Perhaps if you study enough you might find a way to distract yourself from the main issue?

It has become apparent, now more than ever, that passive indexing and the usage of ETFs can be an answer to a scheme that has been so adeptly perpetrated on the American public. We have been led to believe the idea that we have to "beat" the market.and that we need the brokerage industry to do it.

It is a statistical fact year after year that approximately 80% of all mutual fund managers do NOT beat the S&P 500. The principle beneficiary year after year of this mega-mind control is the brokerage industry. Regardless of which way it goes, trades get made.

If you didn't follow through on your promises in your business how long would you remain in business? Do you think perhaps you might be fired if you repeatedly didn't keep your promises? I encourage investors to examine the choices available before they decide to hire a money manager who makes promises of being smarter than the market. Choose money managers that understand the virtues of passive investing.

W. Todd Hickman is a Registered Financial Consultant with Asset Growth Associates of Texas and has been in the financial services industry since 1987. Mr. Hickman co-hosts the financial call-in talk show "That's The Bottom Line" every Tuesday evening on Clear Channel 560AM KLVI. You can learn more about his radio program at the show's website You can find out more about his firm at You can also reach him at his offices at (409) 840-6900.