Scams – You must be kidding!

30th August 2011 by Mindful Money

Following the Wilmot trial and with Madoff on his 150 year sentence, the FSA are trying to stop people falling victim to “boiler rooms”, Ponzi schemes etc.

Of course, being the FSA, they are over-complicating and giving too much information, so their advice has a “ten point plan”.

That’s actually too many points – human beings don’t react well to that amount of information, despite the biblical precedent (how many of the 10 commandments can you remember?)

Also they are talking about £200 million a year in “boiler room scams”, when, according to the Office of Fair Trading (2006), 3.2 million adults in the UK fall victim to mass marketed scams every year, and collectively lose £3.5 billion.

The OFT figure is more significant because it doesn’t matter what sort of scam you’re involved in, what matters is whether you get scammed at all.

If you’re interested in finding out about things by all means look at the FSA website.

But I’d suggest that you first read the OFT report, The psychology of scams: Provoking and committing errors of judgement, produced by the University of Exeter School of Psychology.

OK, I’m biased, it’s sound psychology, produced by professional researchers, some of whom I know.

But it tells you what you actually need to know – some of which I’ve copied word for word below and used the original emphasis:

It was striking how some scam victims kept their decision to respond private and avoided speaking about it with family members or friends.

Point 1

If you find yourself keeping quiet about an investment, you probably know it is daft.

Just in case you think that you are an expert investor the report also points out that:

Scam victims often have better than average background knowledge in the area of the scam content.

Point 2

If you think you’re an expert, you’re probably overconfident that you can’t be wrong.

But the thing that is more important, as far as I’m concerned is totally counter intuitive.

It’s pretty well established that humans have two main decision making systems (they are linked and there are really more than two, but for convenience, they’re referred to as two separate systems).

One is intuitive – out “gut instinct”.  This is pretty effortless, quick and is what we use most of the time – like deciding which shoe to put on first, how to reach out to pick something up etc.

The other is more thoughtful – (note it is “more” thoughtful, it isn’t totally rational).  This one is hard work, slower and, while still not logical or rational, has more in common with what we regard as “reasoning” than our intuitive system.

Many people, mistakenly, think that this system is totally rational and always works better.

It doesn’t.

This is a subject in itself (covered in my book!)– but in relation to scams, and quoting the OFT report again:

Scam victims report that they put more cognitive effort into analysing scam content than non-victims.

So it doesn’t sound as if people fall victim to scams because they invest too little cognitive energy, but because they put in too much – they over-use the “reason” not “intuition” system.

Point 3

I can’t put it better than the conclusion of the report’s executive summary:

The research suggest that victims are often acting against their own better judgement: with some part of their minds they recognise a scam for what it is.

If you think an offer might be a scam, it almost certainly is – your gut instinct is almost invariably right.

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3 thoughts on “Scams – You must be kidding!”

  1. Anonymous says:

    Kim – super. May I add one small point, that of “going with the herd”. If those around you can see the potential (or the positive side), is it more likely that an individual’s intuitive or even gut feelings will be swayed by such momentum?
    Having never been a victim, I don’t know but I do feel that this might colour our judgement. 

  2. Anonymous says:

    Good point – but I’m really talking about individual scams in the article.  When somebody mails you to get their late father’s money out of Nigeria, calls about a wonderful stock tip or offers you a share in a gold mine, your gut tells you it’s a con.  If you read in the paper that lots of people say Enron is a good investment, that US property can never fall or that dot com stock is bound to rise, it’s a bubble (or another Nobel prize winning economist showing that he can theorise, but not stay in contact with planet Earth).  Herds tend to get into bubbles by collectively assuming others have inside information, and hence reinforcing the herd by sharing fictional “knowledge” through share prices, individuals get into scams by individually ignoring their own intuition – usually they know they are scams (as in the article) hence they don’t compare notes and share false information, they just lose on their own. 

  3. Anonymous says:

    Yes, I got well and truly scammed once.   It was by Equitable Life that umpteen hundred year old,
     well thought of, company with a very high rating from Ernst & Young.   I have been very very cautious about anything coming out of London ever since and certainly do not trust rating agencies or government regulating agencies anymore.   Probably a bit of overreaction, but I’ll stick with it.   Now, I ask you, could any one have seen that wreck coming?   Intuition?  Planning?

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