Why We Keep Falling For Financial Scams

1. Why We Keep Falling For Financial Scams By: Amanda W, Jason S, Adam Y, Thomas T, and Jeanette W

2. About the Author • By Psychologist Stephen Greenspan • Wrote “Annals of Gullibility” which explains why people behave in a manner that expose them to severe and predictable risks • After writing this book, he lost some of his retirement savings in the Madoff Scam • Invested in one of 15 “feeder” hedge funds • Wanted to maintain enough wealth to build and maintain a happy and secure retirement

3. The History of Ponzi Schemes • Ponzi Scheme: a fraud in which invested money is pocketed by the schemer and investors who wish to redeem their money are actually paid out of the proceeds from new investors. • Charles Ponzi • Italian Immigrant • Pocketed millions of dollars • Promised huge return on investments

4. Lloyd’s of London Scheme • Famed insurance market • Rapidly brought new investors into its formerly exclusive market • Promised good returns • Lured people in by the chance to become a “name” (prestigious status) • Led to ruin in many cases

5. Inheritance Scams • A purported heir to a huge fortune asks for a short-term investment in order to clear up legal difficulties involving inheritance • Investor is promised a huge returns for the short-term loan • Modern internet version • The “419 scam”

6. Thèrése Humbert’s Scam • Occurred in France in the 1880s and 1890s • Claimed to be the heiress to the fortune of rich American, Robert Henry Crawford • Milked the story for 20 years and was able to live in high style • “The greatest scandal of the century” • Kept going by her prestigious father-in-law who publically reassured investors

7. The Drake Scheme • Perpetrated by a former Illinois farm boy, Oscar Hartzell • Swindled over 100,000 farmers and shopkeepers • Claimed that Sir Francis Drake died without any children and the will stated that Colonel Drexel Drake was heir to the estate • Colonel Drexel didn’t want to estate since he was about to marry his wealthy niece so he turned his interest over to Mr. Hartzell • Became a social movement known as “the Drakers” • Hartzell was eventually indicted for fraud

8. The Madoff Scam: “Rye Prime Bond Fund” • Run by highly regarded money manager and former chairman of Nasdaq, Bernard Madoff • “Rye Prime Bond Fund” was part of the respected Tremont family of funds • Defrauded wealthy investors and charities of at least $50 billion. • Offered modest rather than spectacular gains • Small but steady returns, high enough to be attractive but not so high as to arouse suspicion

9. Reasons Humans are Gullible • Situations • Gullible behavior is most likely to occur when the social and situational pressures are strong • The Madoff scam had very strong social feedback pressures • Most of the investors in Mr. Madoff’s scheme were Jewish and Mr. Madoff was known as a prominent Jewish philanthropist

10. Reasons Humans are Gullible • Cognition • Deficiencies in knowledge or clear thinking are often implicated in a gullible act • There is a distinction between intelligence and rationality • Irrational decisions are driven by the use of intuitive, impulsive and non reflective cognitive styles, often driven by emotion

11. Reasons Humans are Gullible • Personality • Not all highly trusting people are gullible • The need to be the nice guy who always says “yes” • Trust and niceness accompanied by tendency toward risk-taking and impulsive decision-making

12. Reasons Humans are Gullible • Emotion • Emotion that motivates gullible behavior is excitement at the prospect of increasing and protecting one’s wealth • Greed • Due to modest returns in the Madoff Scam, investors were most likely not driven by greed

13. Questions???