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Why We Keep Falling For Financial Scams
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Transcript of Why We Keep Falling For Financial Scams
By: Amanda W, Jason S, Adam Y, Thomas T, and Jeanette W
About the AuthorBy Psychologist Stephen GreenspanWrote “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 fundsWanted to maintain enough wealth to build and
maintain a happy and secure retirement
The History of Ponzi SchemesPonzi 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 PonziItalian ImmigrantPocketed millions of dollars
Promised huge return on investments
Lloyd’s of London Scheme
Famed insurance marketRapidly brought new investors into its formerly
exclusive marketPromised good returnsLured people in by the chance to become a
“name” (prestigious status)Led to ruin in many cases
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 versionThe “419 scam”
Thèrése Humbert’s ScamOccurred in France in the 1880s and 1890sClaimed to be the heiress to the fortune of rich
American, Robert Henry CrawfordMilked 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
The Drake SchemePerpetrated by a former Illinois farm boy, Oscar HartzellSwindled over 100,000 farmers and shopkeepersClaimed that Sir Francis Drake died without any children
and the will stated that Colonel Drexel Drake was heir to the estateColonel 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
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 gainsSmall but steady returns, high enough to be
attractive but not so high as to arouse suspicion
Reasons Humans are GullibleSituations
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
Reasons Humans are GullibleCognition
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
Reasons Humans are GulliblePersonality
Not all highly trusting people are gullibleThe need to be the nice guy who always says
“yes”Trust and niceness accompanied by tendency
toward risk-taking and impulsive decision-making
Reasons Humans are GullibleEmotion
Emotion that motivates gullible behavior is excitement at the prospect of increasing and protecting one’s wealth
GreedDue to modest returns in the Madoff Scam,
investors were most likely not driven by greed
Questions???Questions???