It’s easy enough to be a victim of fraud – see last week’s blog for the statistics. This week I want to talk about why we’re easy targets.

Fraud is fascinating. Elizabeth Holmes, founder of the biotech company Theranos, raised nearly a billion dollars from high-profile private investors and venture capitalists and sustained her deception for more than a decade. Bernie Madoff’s victims entrusted him with upwards of $65 billion. Why do we fall for these schemes?

• We want to trust others. Trust is important in building personal and business relationships but misplaced trust is fundamental to every fraud. Roderick Kramer, a social psychologist teaching at Stanford, reported that 95% of his MBA students placed themselves in the upper half of the class when rating their ability to size up the trustworthiness, reliability and honesty of fellow classmates.

• So, we think we’re better than we are at recognizing someone who’s trustworthy and, at the same time, we tend to evaluate the image rather than the substance. Penetrating blue eyes that never seemed to blink, a deep voice and a signature black turtleneck evoking Steve Jobs helped Elizabeth Holmes to scam the executives of Walgreens and Safeway, former Secretary of State George Shultz, media mogul Rupert Murdoch and the like.

• Then there’s the Lake Wobegon effect: the tendency to overestimate our own capabilities aka self-enhancement bias. Most of us think we’re funnier, smarter and more honest than we really are. And many who have expertise in one field think it extends to others, for example, doctors, lawyers, engineers, etc. who wished they’d consulted a financial professional before they’d invested heavily in what turned out to be a pyramid scheme.

• People who have suffered hardships in life may tend to be more gullible. It’s counterintuitive but apparently the more hardships you experience, the more you fault yourself and become vulnerable to someone who promises to make things right, offering a great opportunity for you to change your luck.

• There’s something called “the Barnum Effect” after the famous showman P. T. Barnum. This is our tendency to accept vague information as true and accounts for 41% of Americans believing in psychics – “I see a bright future for you” sounds good to just about everyone.

• Our own work and life experience should help us to detect fraud. We know how hard it is to succeed – it takes education, work, experience, dedication and time! The average age of founders of the most successful startups – those with growth in the top 1% of their industry – was 45. Entrepreneurs don’t find success overnight so be leery of those who do.

We look past the red flags because we want to trust, we have compassion, we think it won’t happen to us and, yes, we’re all a little greedy. ..we’re just human.

Sources:

What Makes People So Gullible?
Elizabeth Holmes and Other Famous Grifters Expose the Myth of Quick and Easy Success
Trusting Jeffrey Epstein Taught a Retail Legend a Hard Lesson: Be Careful Whom You Trust
He Picks the Wrong Friend, Then There’s All Hell to Pay”: How Jeffrey Epstein Got His Hooks into Les Wexner
The Fiends and the Folk Heroes of Grifter Season