Who Falls for Frauds? A Surprising Answer

You might be more susceptible to investment and financial fraud than you think. New research found that the most likely fraud victims do not match the stereotype of a befuddled, uninformed senior living alone.

The NASD Investor Education Foundation sponsored a study to determine who among senior citizens is likely to become a fraud victim, Off the Hook Again: Understanding Why the Elderly are Victimized by Economic Fraud Crimes. The idea behind the study is that investors can better protect themselves from fraud if they know who is most likely to be defrauded and how they are persuaded to invest in frauds. The study exposed some myths and also indicated some effective strategies for avoiding fraud.

Here are some of the key and surprising findings:

• The financially literate are more likely to be victims. That means fraud is not going to be reduced simply by educating people. Instead, strategies beyond financially literacy are needed.

• A wide variety of tactics are used to persuade investors to put their money into frauds. These tactics include fear, intimidation, and friendship. Investors should not believe an investment is safe simply because one particular tactic is not being used. They must be alert to the full range of scam tactics.

• Investment fraud victims are more likely to be optimistic. That makes them less skeptical about claims for an investment and less likely to believe that they are being scammed. Optimism also makes them more likely to engage in “wishful thinking.”

• Free seminars often are a key vehicle for pitching frauds by aggressive salespeople. People who become fraud victims identify themselves as being willing to listen to sales pitches from those they do not know and are more willing to attend free seminars on investing. In other words, they expose themselves to potential frauds more often than others do.

• Fraud perpetrators know the psychological needs of people and tailor their pitches to meet the needs of the individuals in front of them. Investors need to be aware of the different types of pitches and how they are tailored to be emotionally appealing to different people.

• Frauds victims tend to experience more negative life events (illness, financial distress) than non-victims. The theory is that the stress from these events makes them vulnerable to sales pitches.

• Victims also are more likely to rely on their own knowledge and experience. They could be overconfident of their knowledge and judgment, and they are unwilling to seek the advice and opinions of others, thereby missing the benefit of a second opinion.

• Investment victims also are unlikely to report the fraud. There is nothing new in this finding.
  The conclusion is that contrary to what most people think, investment fraud victims are more likely to be male, married, more educated, and have higher levels of income than non-victims. Another key finding is that investment fraud pitches use more psychological manipulation techniques in each sales pitch than other cons do.

  The report is available free from the NASD Foundation at www.nasdfoundation.org.

An interesting feature of the study is its methodology. The researchers analyzed hundreds of hours of undercover audiotape recordings of real cons pitching products. Some of the recordings are available on the web site cited above. You can listen to actual sales pitches of investment frauds and hear the techniques being used. November 2006.