Think it’s just the uneducated or the elderly who fall for Ponzi schemes and deceptive infomercials? Think again. Many victims, particularly those of investment fraud, are educated, wealthy, and financially literate, according to an AARP Foundation study.
Consider the case of Bernard Madoff, whose notorious investment scandal fooled thousands of individuals, including celebrities (Steven Spielberg), financial institutions (HSBC), and schools (New York University).
How exactly does this happen? In this video, Money Talks News founder Stacy Johnson talks to psychology professor Gene Cash about the reasons we fall for scams. After the video, read on for more reasons why smart people do dumb things.
Here are some more factors that contribute to our poor decisions…
1. People aren’t always rational
Every person, at one point in his or her life, has made a quick, irrational decision. Most of us have fallen for the occasional April Fool’s joke or Internet hoax – it’s a part of human nature. In his book, “Who Is Rational? Studies of Individual Differences in Reasoning,” writer Keith Stanovich explains irrational decisions derive from impulsive, non-reflective cognitive styles, often driven by emotion. This is why some individuals are inclined to send money to the desperate student stuck in Europe; he simply needs some cash to get back to America, where he’ll be safe.
2. We’re attracted to financial gain
Irrational decisions are driven by emotion, and our feelings, of course, are heightened when we see something we can benefit from financially. A promise for a $100,000 reward is quite appealing, especially to the father who just lost his job. In recent years, scam artists have taken advantage of America’s struggling economy, enticing consumers with everything from fake deals for renters to get-rich-quick schemes.
Here’s a hint: If something seems too good to be true, it probably is. Take that as your first signal to do some investigating.
3. We’re more vulnerable when we think we’re an expert
According to a study by the University of Exeter, individuals are more vulnerable to a scam if they are knowledgeable about the scam’s subject. For example, lottery ticket buyers are more likely to fall for lottery or sweepstakes scams, while investors are most susceptible to investment fraud. When individuals view themselves as an expert, they’re more likely to let their guard down.
4. People don’t like to back down from a long-term commitment
Once a victim starts spending money, it’s difficult to stop. Many people worry their time and investments will go to waste if they don’t follow through with the process. A consumer is promised to feel healthier with those herbal pills, or guaranteed to look younger with that wrinkle cream – that’s after he or she has paid monthly installments and used the product for at least two years.
5. We have a tendency to trust authority
Many of us have an obligation to obey authorities, and therefore, we trust them. As a result, scam artists send us fraudulent emails that appear to be from trusted organizations, such as banks and loan companies. In a common scam, consumers receive emails that appear to be from the IRS; they are asked to provide personal information in return for a tax refund they haven’t yet claimed. Scam artists will also pose as employees from your water company, insisting you need to pay for a water test in your home.
If you’re unsure if you’re dealing with a legitimate source, look up the contact info of the company or organization (even if a number is provided in the literature you have in your hand), call the number you find, and ask questions to see if all the facts match up. If a scam artist appears at your door, always ask to see identification – and don’t hesitate to turn him away if that quick flash of a badge seems suspicious.
6. Scare tactics, well, scare us
Many scams require that we act fast, or we’ll lose everything we have. In a scheme reported in September, scam artists told people they kidnapped a loved one and would hurt or kill that person unless they were paid. In this situation, victims are made to feel helpless, so they hand over any money they have.
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