“The best way to spot investment fraud is the promise of safety and very high returns. If someone offers you this, turn 180 degrees and do not walk – run.” – William Bernstein
In his book Think Twice, Michael J. Mauboussin writes about Stephen Greenspan, a psychology professor who spent a good portion of his career studying gullibility – the tendency to be duped or manipulated. In December 2008 Greenspan released a book summarizing what he had learned about this important topic. The name of his book was Annals of Gullibility: Why We Get Duped and How to Avoid It.
No sooner was the book released than Bernie Madoff’s massive Ponzi scheme came crashing down costing investors over $60 billion. One of Madoff’s victims was professor Greenspan, who lost about 30 percent of his retirement savings in the scam.
Love and Lies in Fireflies
If the person who, literally, wrote the book about not falling for scams becomes a victim, what chance is there for the rest of us? Part of the answer comes from the fascinating world of fireflies.
Our family lives in the mountains and deserts of Utah, where there aren’t any fireflies, but my wife, Alice, is from South Carolina. Whenever we visit that part of the country the fluorescent green blinking lights starting at dusk captivate me and the children and let Alice know that she is back on her home turf.
Scientists have learned that there is more than meets the eye in this nightly light show. Apparently the blinking lights help fireflies locate potential mates. One scientist went so far as to describe it as a firefly booty dance. However, it is not all fun and games. Potential danger also lurks in the darkness.
In his classic book, Influence: The Psychology of Persuasion, Robert Cialdini describes, “the deadly trick played by the killer females of one genus of firefly (Photuris) on the males of another firefly genus (Photinus). Understandably, the Photinus males scrupulously avoid contact with the bloodthirsty Photuris females. But through centuries of experience, the female hunters have located a weakness in their prey – a special blinking courtship code by which members of the victims’ species tell one another they are ready to mate. Somehow, the Photuris female has cracked the Photinus courtship code. By mimicking the flashing mating signals of her prey, the murderess is able to feast on the bodies of males whose triggered courtship tapes cause them to fly mechanically into death’s, not love’s embrace.”
There are many similarities between firefly mating rituals and human investment scams. As in the world of fireflies some humans make a living deceiving others. Also similar to fireflies, they do this by “cracking the code” and sending the exact message people want to hear. Just as fireflies have an inherent desire to mate, humans have a strong intrinsic need to improve themselves financially. This is generally a good thing but in the hands of a con artist this desire can be turned against us.
However, we do have one advantage male Photinus fireflies lack – brainpower. Fireflies have a very small brain. They are really not capable of thought. Almost everything they do is controlled by instinct. When they see the blinking courtship code in response to their own message they respond instinctively (what Cialidini calls “running the tape”). They don’t really have a choice.
Humans also have tapes we run in response to certain cues. These help us function in a complicated world by limiting the number of decisions we need to make each day. Over time these tapes become habits. However, unlike fireflies we are capable of overriding the tapes when necessary. It is not easy for us to do, but it is possible.
Stop the Tape and Investigate
In order to override our tapes we need a warning sign, a cue that tells us danger could be lurking and we should proceed with caution. As it relates to avoiding financial scams asking ourselves two important questions before giving anyone our money can keep us out of trouble.
I was reminded of the first question in a recent church meeting where the great religious leader Dieter F. Uchtdorf was speaking to the men of the Church of Jesus Christ of Latter-Day Saints. President Uchtdorf warned the single men about the danger of holding out for the “perfect woman” by lovingly telling them, “My beloved brethren, may I remind you, if there were a perfect woman, do you really think she would be that interested in you?”
Con artists lure us in by offering us the “perfect” investment (low risk with high and steady returns). This is precisely what Madoff was offering. If there were such an investment, do you really think someone would be offering it to you? Or, as my lovely wife, Alice, would say in her darling southern accent, “Why li’l ol’ me?”
If someone is trying to sell you an investment that is too good to be true it should be an immediate signal that something is not right, which should trigger you to ask, “Out of all the people in the world, why is this “perfect” investment being offered to me? Unless there is a logical answer, run the other way. It all comes back to the old adage, “If it sounds too good to be true, it is!”
The second question you need to ask is, “What’s in it for the other party?” What does the person making you the offer have to gain from you accepting it? If someone really had access to the “perfect” investment they would already be so wealthy they wouldn’t need to be selling it to you. Be particularly wary if the seller is using high pressure tactics such as stating that if you don’t invest right now the opportunity will be lost.
Asking these two questions is a great start in immunizing yourself from financial scams. For more information here is a link to a short article by the Securities and Exchange Commission (SEC) called How to Avoid Fraud that offers more ideas on how to keep yourself from becoming a victim.
Asking these two questions would save a lot of male fireflies from becoming dinner for devious females. While they are not capable of asking these questions, you are. They gave up their lives to teach you a lesson. So the next time you receive a financial offer that is too good to be true, think of the hapless male fireflies; in their honor, stop the tape and investigate. Doing so can keep you from becoming a victim of financial fraud.