Why even smart people fall for scams

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Tess Vigeland: When you think of the victims of "investment fraud," who do you picture as the typical mark? Little old lady? A person with no financial know-how? Think again -- and listen up. Because this is a problem that is growing in size and scope with each passing day of the economic downturn. The AARP did a study (PDF) that looked at the victims of investment fraud. And we're joined by the man who heads up the organization in Washington state, who also happens to be a former fraud investigator and assistant attorney general there.

Doug Shadel, welcome to the program.

Doug Shadel: Great to be here.

Vigeland: So what was your study about? What were you looking to find?

Shadel: The AARP Foundation study was about comparing the general public from people we've identified as victims of fraud to see if is there a difference in how they behave, how they look at the world and who they are demographically. And we found, of course, there were differences.

Vigeland: Well, let's talk about those. You know, I think probably the image that springs to mind is someone who is perhaps on the latter side of life, particularly looking for help with managing their money. Is that accurate?

Shadel: Well, a lot of the victims in our study were in fact older and we didn't just act for older victims 'cause we are AARP. But what a lot of times people have in their minds that a victim of fraud is someone who's lost their mind. They may have cognitive impairment or elderly widows living alone. And while that is clearly a segment of this victim population, there's also a huge population of investment fraud victims who are just the opposite. They tend to be wealthier, they tend to have more education than the general public. And most interestingly they tend to be more financially literate than the general public.

Vigeland: Well, that's really interesting particularly in light of what we've heard of Bernie Madoff's victims. You know, there were a lot of smart and wealthy people who fell for that.

Shadel: Absolutely right. And in the case of Bernie Madoff -- we found this in some of our studies -- a lot of times people don't simply have time or they don't do due diligence. They rely on the opinion of a friend, you know? And in that case also, ask people, "What was I investing in?" and a lot of them couldn't tell you. There's actually some very simple ways to avoid this, it's just that a lot of times people won't do them.

Vigeland: Did you get any sense of why we don't? Is it because we're afraid we're not going to know the difference anyway, that we just don't have time to do our homework?

Shadel: I think it's overdetermined, that is there are multiple reasons. I interviewed a guy who was a retired chemistry professor. He lost $900,000 to a movie investment scam. There's a series of them. And when you ask him "Why didn't you ask all these questions and do this due diligence?" He goes, "I'm from a university community. Everyone I dealt with for 40 years is trustworthy. It never occurred to me that somebody would look me in the eye and lie directly." Now you can say at one level that's a level of naivete. But when you think about it, we do tend to trust the people who we operate with day-in and day-out. And if those people are generally trustworthy, you get into this sort of false sense of security.

The other big thing that we have found in our research in interviewing con men is that they all say they're trying to do the same thing to the victim. And that is get them under the ether. What do we mean by ether? Ether is a heightened emotional state where you're excited to make a lot of money or there's some other reason why they can get you off-balance. And making a decision based on emotion. And one con man said, "I get them into the heights of ether. If they drop to the valley of logic, then I've lost them."

Vigeland: Geez. Well, you know, you actually have some audio of a con man trying to persuade someone. Although, he didn't know that person was an undercover agent. Let's give a listen to that.

Con Man 1: I said I would not call unless it was rare and definitely undervalued situation.

Con Man 2: Are you familiar with the $2.50 gold Indian series?

Con Man 3: Now John, back in 1860 from the Philadelphia mint, there were 22,675 of these coins minted. Of those 22,000, only four have survived Only four!

Con Man 4: Take and write down what I'm gonna tell you and do exactly as I tell ya and don't switch up on me again, OK?

Con Man 5: If you don't want to make up your mind right now, that's where I come in. I will make up your mind for you.

Vigeland: All right, so this was obviously a few examples of con men who have been caught in the act. But I don't know, you know, I listen to those and I think, well, if I ever heard of those people on my phone, of course I would hang up. So what is it that gets people to trust them?

Shadel: Yeah, I mean, it's again it can be a complex series of things. But those tapes you listened to were several of 300 or more tapes that we transcribed and analyzed to see if there are common tactics that were common to all the different kinds of scams. And the ones you heard there are common, where it says you know, there are 22,000 coins and there are only four. What is that? That's the tactic of scarcity. So there's something in our gut that goes back to the alligator brain in us that says, if you're running out of food, must get food. If you're running out of coins, must get coin and it causes your gut to panic and you start thinking irrationally. Before this call I never even wanted a coin, but now somehow I need it, right? SO I think a lot of that is what's going on. And the people on these phones are experts at what they do.

Vigeland: Right. I guess that's why the call 'em confidence men, right?

Shadel: There you go.

Vigeland: If it is one of those things where there's this dinosaur portion of our brain that's taking over, how do we fight against that? How do you keep yourself from falling victim to something like this?

Shadel: Yeah. Getting back to the study, one of the things we found in the studies is that victims differ from non-victims in a couple important ways. One way they differ is that they expose themselves to the marketplace more. They're much more likely to go to a free lunch seminar or a free dinner seminar. They're more likely to read junk mail, they're more likely to send away for a free CD. So the combination of exposing yourself to sales situations more and possibly having a lower threshold where that emotion is triggered -- low self-control, you might say -- is the combination of the two.

So one simple way to avoid this is to not expose yourself to much of the sales situations. But then if you do, and you feel that heartbeat starting to palpitate, you know, you're starting to get excited -- simply wait for it to go away, so that the emotion part of your mind can subside and you can just ask a simple due diligence questions. And more of the problems we see in this area would go away if people did that.

Vigeland: Doug Shadel is the state director for the AARP in Washington state and we've been talking about that organization's study on victims of investment scams. Thank you so much for being with us.

Shadel: My pleasure.

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