Why People Fall Victim To Scams

Attention value investors, intelligent readers, & dilligent citizens don’t miss out on this article.  If you’re interested in a comprehensive study outlining the human tendency to fall for scams and rackets this study is for you.

Paper Introduction (Via Office Of Fair Trading)

A ‘Scam’ is ‘a trick, a ruse; a swindle, a racket’ (Oxford English Dictionary). Scam, as it is used currently, is both more specific and more general than its nearest synonym, ‘Fraud’. Scams have often come to refer to a particular kind of fraudulent or misleading practice, characterised by widely disseminated initial approaches at long distance to people not known to the perpetrator (‘scammer’); the scammer expects a low rate of return on the offer but is able to make a profit because the approach has low cost.

According to the OFT (2006), 3.2 million people in the UK fall victim to scams, and lose more than £3.5 billion every year. Why does this happen? Why do some scam victims even react repeatedly so that some of them lose their entire life savings as well as their psychological health? However, as well as understanding scams better, we also want to help combat them more effectively. So we also want to know how an improved understanding of the psychology of scams can play a part in reducing the damage that scams do, for example by informing the development of more effective consumer education messages.

A successful scam involves all the standard elements of the ‘marketing mix’ (McCarthy, 1960), Product, Price, Place and Promotion. It also involves the building of a relationship between marketer and customer (Berry, 1983) – that is, between scammer and victim. There may even be an element of repeat selling; certainly OFT experience strongly suggests that anyone who has been a victim of one scam is more likely to be approached by other scammers in future (as their name will be placed on a so-called ‘suckers list’), and in a complex scam, there may be many points at which the victim has to take a positive decision in order for the scam to move forward.

Additional Excerpts (Via Office Of Fair Trading)

The likely existence of a subset of the population with enhanced vulnerability to scams is both a problem and an opportunity from a consumer education point of view. It is a problem in that it suggests that a high proportion of any general awareness campaign will be wasted on people who are relatively unlikely ever to fall for a scam. It is an opportunity in that if the more vulnerable group can be identified – or can be encouraged to self-identify – educational material can be targeted at them.

In particular, people who reported having previously responded to a scam were consistently more likely to show interest in responding again.

Our focus on falling for a scam as an error of judgement addresses one of the most mystifying features of the scam phenomenon. The existence of scams and scammers is well known. A retrospective account of someone responding to a scam, especially if given briefly, very often elicits the reaction, ‘How on earth could anyone fall for that?’ – because on rational analysis, it must have been obvious that the scam was just that, a scam. But the assumption that people’s decisions and choices are reliably rational is at best a crude approximation that applies only on the average.

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18. May 2009 by Miguel Barbosa
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