THE BIZOP NEWS

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One of theoretical stances this blog takes is to analyze ordinary decision making behaviour by understanding how clearly fraudulent schemes work by identifying which compliance tricks are in play.

When we can see the mechanisms at work in a deliberate fraud, identify the parts, and are confident about the psychology of compliance tools, we are better prepared to understand frauds cloaked in the forms of normality and social convention.  These conventions mask the serious fraud - we simply don't see it.

For example, John Kenneth Galbraith identified one "innocent fraud", the control of their compensation by senior managers in the modern corporation. These incentive structures which allowed certain individuals to control public companies, make incredibly risky bets for the shareholders, but transfer wealth via bonuses to decision makers independently of whether the risk or gamble worked.

How was it possible for the Board of Directors not to see this conflict and act to avoid it?  How can we see a fraud and yet ignore it?

Michael Shermer thinks has an explanation or at least a metaphor.

Would you be fool enough to fall for the three-card monte?

Most of us would say no, because we have heard that it's a con, or we've seen shows like the one I produced, or we've read about it in a magazine or a book.

But if you had never heard of the game and saw one being played, by the information of your senses you would see some people winning (you wouldn't know that these are shills) and you would not see the sleight-of-hand move.

So it would not be unreasonable to believe that you stand a reasonable chance of winning.

In other words, what signs would there be that a con was underway?

The analogy holds for Madoff-level investment scams.

Short of just being skeptical of all investment technologies (which, obviously, most of us are not and that's what helps fuel the modern economy), how are any of us to know which investment companies are legit and which are not? The SEC? We've seen how well that works, so what's an investor to do?

For this to work as more than a metaphor, we would need to examine in more detail why the con works

It is hard for someone to entertain the supposition that the con artist only takes on losing bets. Even if you bet randomly, you would think that you would have a 1/3 chance of winning.

But the con criminal has no intention of taking your bet if it is a winner. Either the shill working with the criminal will place a higher bet on a losing card, the game will be busted up by the arrival of "police", you will be paid in counterfeit money, a switch of cards will be made at the last minute, a "thief" will steal everyone's money, you will double down, or the game will suddenly end.

All of the consequences which seemed improbable before you place your bet, are easily imagined once you adopt the claim that the con criminal will not pay out on any winning bet. It is easy to generate explanations of how this could be so once you adopt the view; it turns out to be hard to adopt this skeptical view. This is what prevents most check-list due diligence from succeeding.