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Tuesday 19 May 2009

The Psychology of Scams

Gullible Brits, Smart Scammers

The UK’s Office of Fair Trading (OFT), an arm of government concerned with stopping consumers being ripped off, has just published a study into The Psychology of Scams looking at why 3.2 million adult Brits manage to lose £3.5 billon ($5.4 billion) to scammers each year. The fact that they’re looking into the psychological reasons that the victims throw their money away, with a view to stopping them from doing so, suggests an enlightened view in the British civil service that hadn’t been previously noticeable.

Some of the results are really interesting. It seems you’re more likely to fall victim to a scam if you think about it or, if you’ve previous knowledge in the area that the scam’s targeting, you’re likely to suffer from overconfidence in your ability to detect a problem. So are we all potential victims?

A Study of Scammees

The study is, as far as I know, the first in-depth attempt to understand why people throw their money away on schemes which, for the most part, look like the most obvious deceits in the world. This shows one of the problems of psychology – we each have our own, and we need to sometimes acknowledge that there are other ways of behaving.

The scams in question run from those Nigerian 419 Advance Fee “business opportunities”, through to international sweepstakes, fake clairvoyant offers, home work opportunities and investment boiler rooms. They make their money in many ways – by getting people to send small amounts in return for potentially huge winnings, by sequentially tapping for small amounts, through spurious calls to premium phone numbers, for purchases of worthless investments and by getting victims to deliver large sums in return for moonshine. Some sequential victims lose all of their money in these frauds.

Scam Victims

Two psychological traits seem to be specifically implicated in scam victimhood. Firstly there’s the classic appeal to authority. Our world is just too complex for us to understand everything that’s going on so we need to take decision making shortcuts. Hence we defer to doctors for medical advice and lawyers for legal advice and politicians for hints on deception. The point is that we’re programmed to respond to and believe in authority figures. Many scams appeal to this basic persuasion technique.

Secondly the scammers target their appeals to emotional instincts – greed being a fairly common factor. Other human needs are also exploited, including avoidance of pain or the desire to be liked. Generally this has the effect of reducing the amount of real analysis that some people do about the details of the offer by causing them to focus on the specific area of emotional appeal.

Born To Be Scammed?

One other interesting and counterintuitive finding is that scam victims spend more time thinking about the offers than non-victims. Most of us simply discard the mail or delete the email without a second thought. However, a significant minority will closely scrutinise the scam before, naturally, concluding that it’s something they’d like to spend their money on. Worse still, many people will serially fall victim to scammers. All of which suggests that some of us really are born victims.

Which is exactly what the research report indicates – between 10% and 20% of people seem to be naturally more susceptible to scams, apparently because they’re more likely to be open to persuasive techniques. Even though, to be frank, most of the scams quoted look like they’ve been put together by a teenager in a hurry to a hot date it’s clear that the combination of these factors is enough to justify the huge volume of junk mail, both snail and electronic, that piles up at our doors every year.

Nor is this something that experience will necessarily protect you against. Boiler rooms, those scam hot houses from which operators phone potential investors with news of some exciting, never to be missed new stock issue which you absolutely must invest in now or miss the chance of a lifetime, seem to be particularly successful at extracting money from people who already have some investment experience. Some people are simply more open to persuasion, no matter what their background.

Victims’ Psychological Triggers

Other triggers which behavioural psychologists and PSB readers will have little trouble recognising include appeals to scarcity, commitment bias and phantom fixation. Scarcity appeals target our urge to possess something that soon may no longer be available. This is a fairly typical marketing ploy by legitimate companies and even there is often pretty cynical.

Commitment bias is a common and nasty trait whereby once we’ve made a small commitment we’re apt to carry on making larger and larger ones, chasing our losses. It happens regularly on the stockmarket where investors “double up” chasing a loss rather than dispassionately analysing the reason why a stock’s dropped significantly. Phantom fixation is the focus on the potential large reward on offer rather than the unlikely odds of ever winning. It’s frequently found in lottery players, although at least their odds are better than those of the scam victims. Note that the potential reward isn’t always financial and it may be targeted at emotional, medical or other weaknesses as well.

If you’re not one of the susceptible 20% – or at least, not yet – it’s easy to be cynical about scam victims. Sadly, these people are often amongst the most vulnerable in our societies – the elderly, the ill educated and the socially isolated. Anyway, scammers are the scum of the earth and anything we can do to eradicate them is good in my book.

Stop the Victims

The study suggests a focus on stopping people becoming victims rather than the endless and expensive attempt to destroy the self-perpetuating community of scammers. It also provides some interesting and indicative research which is suggestive of possible defences. In particular the authors note that most non-victims spend virtually no effort analysing the scams, they simply throw them away. Helping potential victims to recognise the instant cues that indicate a scam may be the simplest method of reducing the problem.

The study also shows how such research brings with it real difficulties for the researchers. Ideally they’d simply run their own set of scams to see who falls victim and why. These days, however, psychologists work under a code of ethics that prevents them doing stuff that deceives or potentially damages the self-esteem of experimental subjects: which naturally is a bit of a problem when you’re trying to study deceit. Instead they have to resort to less clear cut studies which may indicate the problems but don’t provide particularly clear cut evidence.

Scammers and Marketeers

Still, at root the study suggests that there are a set of cognitive and motivational processes – that’s thought and emotion to you and me – that cause a subset of people to be more likely to become victims. Although the rest of us may find it hard to sympathise we may like to reflect that many of the same techniques that the scammers use on their marks are used on the general populace by more orthodox marketing organisations every day.

All marketing, scam or orthodox, is aimed at making us spend our time or money on something. Judging that this is worthwhile is a complex process – scammers use this complexity to their own advantage, taking a free ride on the methods and techniques of modern marketers, using human psychological weaknesses and processing shortcuts to blind victims to the foolishness of their actions.

Mutual fund, anybody?

The best general book on the psychology of persuasion remains Robert Caldini’s Influence: The Psychology of Persuasion. Comes recommended by no less than Charlie Munger.

Related Posts: Seven Psychological Quirks that Destroy Returns

1 comment:

  1. Perhaps it isn't that people are born to be easily persuaded, but that at particularly vulnerable periods of their lives, they are more susceptible to persuasion.