Hello Sucker!
There is an interesting article, written by Donna Rosato, at CNNMoney . Donna Rosato has interviewed not only the usual suspects, but also three sharp psychologists, one of whom I want to focus on in the next paragraph. Her main conclusion, which I heartily endorse, is that
"To protect yourself from becoming the next statistic, your first step is this: Get over the idea that you're too smart to be conned. Certainly it helps to know the earmarks of common swindles so that alarms go off when one crosses your path."
In the article, there is a discussion of our good friend Kirk Wright.
"Last year seven NFL players were allegedly cheated out of $20 million by International Management Associates, a hedge fund promising 30% annual returns. The fund's manager, Kirk Wright, had worked his way into the players' professional network - he'd even been vetted by the NFL Players Association's Registered Financial Advisors program. (Now being sued by the victims, the NFLPA maintains that Wright was not in the program at the time the players invested.)A Harvard-educated smooth talker who owned three sports cars and lived in a million-dollar home, Wright socialized with players at his hospitality suite at football games and convinced them to invest. Former Philadelphia Eagle Blaine Bishop, 36, turned over millions of dollars to Wright - and realized it was gone only when Wright was arrested in May for embezzlement.
"I'll never be able to make up that loss," Bishop says.
It's easy to point out how improbable Wright's promised 30% return was, ..., and to criticize Bishop and Niggeling for believing in them.
But in the middle of an affinity fraud, such perspective is hard to come by. In fact, once people you trust have embraced a scheme, it runs against human nature not to be swept up in it.
According to research done by Emory University neuroscientist Gregory Berns, when we go along with peers, activity in a part of the brain that thinks analytically may decrease, presumably reducing our skepticism. And when we go against consensus, there's a reaction in the part of the brain usually triggered by fear.
So we're afraid to go against the crowd, even when confronted with plain evidence.
Is Gregory Burns correct with his explanation about affinity frauds? I don't doubt that bucking the trend when presented with overwhelming group consensus is hard, although on a personal note I happen to find it relatively easy. But what makes an affinity fraud work? I have discussed this before writing about the practical importance of Bayes Theorem and David Hume. The basic idea is this. When a trusted friend, member of a social group, reports to you that some "miraculous" economic event has happened, you should not investigate by framing the question: has my trusted friend lied or not?
What you should do is to contemplate that your trusted friend is neither a liar nor truth teller, but rather simply sincerely or honestly mistaken in his or her belief. You should not challenge the sincerity, but you need to verify the quality of the reporting. If you frame the question as: is the reporter lying or truth telling, then you are committed to action if you cannot show that there is a lie. But if you are merely trying to verify the quality of reporting, you haven't committed yourself to any action, except for believing that it is highly unlikely that your friend is accurate in their reporting of the economic miracle.
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