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No One's Too Smart to Fall for a Scam

By:
Chris Gaetano
Published Date:
Apr 30, 2018
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When looking at the all-too-common-nowadays news of cons, frauds and scams, it is tempting to think that all those other people fell for what seemed like an obvious trap. However, a commentator at CNBC is warning people not to give in to this temptation, as one of the first steps in protecting yourself from a scam is by acknowledging that, as devastating an intellect as you are, you too can be a victim. The commentator pointed out that one of the biggest scams in history, Bernie Madoff's famous multibillion-dollar Ponzi scheme, targeted educated people with at least some knowledge of how the financial world worked, many of whom likely thought of themselves as pretty smart. 

Before dismissing everyone else as hapless suckers, consider first the Dunning-Kruger effect, a well-demonstrated psychological phenomenon whereby people not only vastly overestimate their competence, they lack the competence to know they are doing so in the first place. Basically, we do not know the limits of our own knowledge, which then leads us to the question: How exactly do you know you're too smart to fall for a scam? This phenomena was explicitly named in an academic paper by David Modic, who cited "illusions of superiority and control" as a risk factor in what he called "scam compliance." 

"Following this logic, prospective scam victims might overestimate their ability to detect fraud, both because they, on average, think that they are better at detecting fraud than they actually are, and because they think they are more in control of the situation than they actually are," said the Modic in his paper. 

Another recent study echoes this point specifically when it comes to phishing scams. The study had 600 research subjects try to differentiate between legitimate business emails and phishing scams. What it found was that how confident someone was in being able to perform this task made no difference at all in how well that person did. One of the co-authors of this study, H.R. Rao, knows all too well the consequences of overestimating one's ability to detect scams: Despite being a cybersecurity researcher with years of experience, he himself nearly fell for a phishing email involving someone impersonating UPS. 

The AARP, meanwhile, found in a recent survey that those with a four-year college degree or more were actually more likely to be victims of investment fraud. Among general investors, 55.8 percent had at least a bachelor's degree; among those who were victims of investment fraud, that proportion grows to 62.1 percent. Further, the survey found that the most active traders were also the most likely to fall for an investment scam. Of those who make one to four investment decisions a year, 27 percent had fallen victim to investment fraud; among those who make five or more decisions per year, though, 42 percent have been victims. 

(The report itself is full of demographic information of who falls for investment scams; for example, 80.8 percent of fraud victims are men versus 19.2 percent of women. Overall, the AARP said, the ideal fraud victim is an older male conservative who sees wealth as a success measure, prefers unregulated investments, usually invests remotely, and makes frequent trades. He will likely be contacted by phone, email or regular mail). 

Another thing to consider is that scams are rarely an intellectual affair. Some may sound smart, but they are designed to play on emotions. While people who feel they are very smart may then think, "OK, well, I'm smart enough to not let my decisions get clouded by judgment and bias," another recent study found that, in actuality, intelligence and bias (at least tribal bias) have very little relation. Very intelligent people can fall prey to scams just as easily as anyone, and this is assuming that they're actually intelligent and not victims of the Dunning-Kruger effect. 

All this is to say that, regardless of whether people consider themselves smart or even are smart, they can still fall for a scam. And, in fact, the more confident people are that they can spot a scam, the more likely it is they will fall for one (just the way those who don't believe they are affected by advertising are in fact much more likely to be affected by advertising).