Why Do Smart People Fall for Scams?

1. Why Do Smart People Fall for Scams? Jennifer Sawayda Anderson School of Management University of New Mexico Albuquerque, NM

2. Introductory Statistics • It is estimated that civil securities fraud costs $40 billion annually. • Often it is the more educated that fall for some of the greatest scams. • Only one in four people report being a victim of investment fraud. Many frauds therefore go unreported.

3. 10 Types of People Who Fall for Fraud • A White Male • Middle aged, educated, under financial pressure • Older People • More susceptible to fraud; fraudsters target them more heavily • Younger People • More vulnerable than older people • Living in Florida • Top state for fraud • Lonely • Online dating sites are prime targets for fraud • Internet • Internet has been most frequently cited contact for fraud

4. 10 Types of People Who Fall for Fraud • Open and Interested • Victims are more likely to be those who are open, extroverted, and agreeable • In Debt • The need for money makes you more vulnerable • Desperate • The more desperate you are, the more likely you are to take chances • Human!!! • As humans we are vulnerable and often act irrationally

5. Reasons for Falling Victim to Fraud • Confirmation Bias • Immediate Emotional Response • Legitimacy • Letting Down Our Guard • Trusting those Closest to You Scam artists aren’t so much artists as they are students of human nature (Bob Frick, Kiplinger, 2011)

6. Confirmation Bias • The tendency to perceive information in ways that are consistent with our beliefs or desires • Confirmation bias causes us to ignore red flags of fraud because we see what we want to see • Confirmation bias is prevalent when consumers believe they have invested too much “into the game” to pull out now

7. Harvard Science Fraud • Harvard’s primate psychologist Marc Hauser fabricated data and manipulated results of experiments • When confronted by others about discrepancies in his experiments, Hauser maintained that his data was correct • Hauser may have fallen prey to confirmation bias • He noted results that favored his hypotheses despite evidence to the contrary • Resigned from Harvard

8. Immediate Emotional Response • In highly emotional situations, emotions tend to override judgment • As a result, people act irrationally and may be more willing to believe something they wouldn’t normally believe • Scam artists are experts at playing at emotions • Frequently occurs when person feels extreme desperation

9. Close Call • A phone caller tricked two women into thinking their daughter was in a car accident, then claimed he had kidnapped her for ransom • They narrowly avoided falling victim to the fraud when they were able to text their daughter • Scammer had gotten details of their personal lives, but there were things that didn’t add up • Women’s emotions clouded judgment; they were willing to do anything due to their fear

10. Legitimacy • The more legitimate a scam looks, the more likely people are to trust it. • Many phishing scams occur this way. People see the logo of the IRS and assume it’s legitimate. • Likely to fool even the most highly educated. • HR and payroll employees were fooled into forwarding W2 forms after cyberthieves tricked them into thinking they were company executives • Impacted hundreds of thousands, including Weight Watchers

11. Bernie Madoff • Operated a $65 billion Ponzi scheme over a few decades • Former chair of the NASDAQ, very well-known in the financial realm • To hook investors he maintained an aura of exclusivity—he wouldn’t just let anyone invest with him • The market would not have been able to support what he was claiming • Despite red flags, his reputation was so great that even the SEC failed to catch him

12. Andrew Casperson • Lost millions in investor funds to fuel a trading addiction • Came from a high-class family; had years of experience working at financial institutions • Promised a consistent 15% annual return with minimal risk • Due to fluctuations in the market, it is highly improbable these returns could be so consistent at such low risk • Yet people and investment firms invested with him due to his high pedigree and reputation • Even his own mother was the victim of his deception • Caught when private-equity firm began asking questions

13. Letting Down Our Guard • People tend to let their guard down if it involves something they really want • Good judgment is put on hold; the desire for a favorable outcome overcomes victim’s risk-adverseness • Reason why “Get Rich Quick” schemes are so popular • The old adage “If it looks too good to be true, it probably is” applies here

14. Cheating an Old Lady • An 86-year-old woman lost $1,600 to a fraudulent scheme—all because she thought she was going to win lots of money • Received sweepstakes letter in the mail telling her that she won millions of dollars • Would receive the prize after sending in a $20 processing fee • After the first time, continued receiving sweepstakes award letters and continued sending in $20 processing fees till she had spent $1,600

15. Familiar Fraud • When a friend or family member uses a close relationship for financial gain • Harder to detect because it involves someone you trust • Familiar fraud victims make up .35% of U.S. adult consumers • Axton Betz-Hamilton battled identity fraud for years. She discovered her mother was the culprit after she passed away. Her mother also cheated her own husband. • Her mother was able to perpetuate the fraud for so long not only because she was a close family member, but she was the one who handled the family finances.

16. Detecting Fraud • Even elaborate fraud schemes can be detected if the right questions are asked or if certain red flags are noticed • Many fraudsters use legitimate looking documents to cover their tracks, but many of these are easily exposed • Comptroller Rita Crundwell stole funds from Dixon, Illinois over a long period. She falsified invoices to make them look like state invoices, but there were several elements missing that legitimate invoices contained. • Although Andrew Caspersen’s documents bore the logo of a legitimate company, a quick call to the company founder uncovered the truth.

17. Other Red Flags • Failure to describe the details • Bernie Madoff claimed the strategy behind his trading success was “secret”; Andrew Caspersen could not answer detailed questions from the firm’s legal team • Encouragement to make a decision quickly • Fraudsters might try to lure you in by saying you only have a limited time to take advantage of this opportunity • The less time you have to think over a decision, the less time you have to analyze its authenticity from a logical standpoint • Having to pay money for a business opportunity • Pyramid schemes work by having the victims pay into the scheme; they are then paid to recruit others rather than selling an actual product

18. How to Avoid Fraud • Ask questions and insist on clarification if something is not clear • You have the right to know how others are using your money • Check to make sure the investment or business opportunity is legitimate • Quick phone calls and research can often determine whether an opportunity is real or fake • Know whether something is too good to be true • For instance, can the market support these consistent returns? • Seek the input of others • Mitigate risk by investing among a number of different stocks • Many invested all they had with Madoff

19. How to Avoid Fraud • Be skeptical of anything you receive asking for personal information, even if it looks legitimate • Most legitimate firms will not ask for passwords, and more than likely you will not be asked to provide your social security number over a less secure site like the Internet • Again, simply doing some research to verify its authenticity can often detect fraud • Have controls in place so that one person is not in charge of all the finances • Do not make money decisions in the spur of the moment or during times of high emotion

20. Conclusions • Be vigilant about investing in legitimate business opportunities and in giving out personal information • Know where your money is going • Fraudsters are not easily identifiable—many are highly respected persons • Therefore, if something doesn’t seem right, pursue it no matter how legitimate and respected the person or institution is

21. Sources • Whistleblower Lawyers Baum HedlundAristei & Goldman, “Securities Fraud,” http://www.whistleblower-claims.com/types-of-fraud/securities-fraud.php (accessed April 15, 2016). • Melissa Dahl, “Why Smart People Fall for Weight Loss Scams,” New York Magazine, June 18, 2014, http://nymag.com/scienceofus/2014/06/why-smart-people-fall-for-weight-loss-scams.html (accessed April 15, 2016). • Martha Deevy, Shoshana Lucich, and Michaela Beals, “Scams, Schemes & Swindles,” Financial Fraud Research Center, 2012, http://fraudresearchcenter.org/wp-content/uploads/2012/11/Scams-Schemes-Swindles-FINAL-On-Website.pdf (accessed April 15, 2016). • Marilyn Lewis, “10 Types of People Who Fall for Scams, Schemes and Cons,” Money Talks, October 14, 2015, http://www.moneytalksnews.com/10-types-people-who-fall-for-scams-schemes-and-cons/ (accessed April 15, 2016). • Bob Frick, “Why We Fall for Scams,” Kiplinger’s, May 2011, http://www.kiplinger.com/article/investing/T031-C000-S002-why-we-fall-for-scams.html (accessed April 15, 2016). • Amanda Geronikos, “6 Reasons Smart People Fall for Scams,” Money Talks, December 26, 2012, http://www.moneytalksnews.com/6-reasons-smart-people-fall-for-scams/ (accessed April 15, 2016). • Scott O. Lilienfeld, “Fudge Factor: A Look at a Harvard Science Fraud Case,” Scientific American, November 1, 2010, http://www.scientificamerican.com/article/fudge-factor/ (accessed April 15, 2016). • Carolyn Y. Johnson, “Ex-Harvard scientist fabricated, manipulated data, report says,” Boston Globe, September 5, 2012, http://www.bostonglobe.com/news/science/2012/09/05/harvard-professor-who-resigned-fabricated-manipulated-data-says/6gDVkzPNxv1ZDkh4wVnKhO/story.html (accessed April 15, 2016). • Neal Karlinsky, Ely Brown, and Lauren Effron, “Phone Scams: Why People Keep Falling for the Oldest Scam in the Book,” ABC News, November 20, 2014, http://abcnews.go.com/US/phone-scams-people-falling-oldest-scam-book/story?id=27065371 (accessed April 15, 2016). • Robin Sidel, “Cyberthieves’ Latest Target: Your Tax Forms,” The Wall Street Journal, April 3, 2016,http://www.wsj.com/articles/online-thieves-target-employee-tax-information-1459715329 (accessed April 15, 2016). • Serena Ng, Bradley Hope, Christopher M. Matthews, and Rob Copeland, “The Unraveling of a Wall Street Scion,” The Wall Street Journal, April 7, 2016, http://www.wsj.com/articles/the-unraveling-of-a-wall-street-scion-1460076768 (accessed April 18, 2016). • Jon Yates, “Big prize money winner…or scam artist’s sucker?” Chicago Tribune, June 17, 2010, http://articles.chicagotribune.com/2010-06-17/business/sc-cons-0617-problem-solver-scams-20100617_1_scam-bank-account-number-letters (accessed April 18, 2016). • Sienna Kossman, “When Family and Friends Steal Your Identity,” Fox, March 17, 2014, http://www.foxbusiness.com/features/2014/03/13/familiar-fraud-when-family-and-friends-steal-your-identity.html (accessed April 18, 2016).