THE BIZOP NEWS

Steve Lubet kindly sent me his new book entitled "Lawyers' Poker: 52 Lessons that Lawyers Can Learn from Card Players", after we had a lively exchange about the: a) the value of slow play at poker, and b) what trial advocacy lessons can be learned from a sophisticated analysis of poker play.

Since I have no pecuniary interest, not being an Amazon associate now, in promoting this new work, you can rely upon a fairly candid review of its merits.

I was more than pleasantly surprised with well how this book worked. My concern was that I would find two interesting books: a) one on trial advocacy, and b) another on poker analysis; and that the two parts would wear out each other like sandpaper and wood, contributing only a fine dust. Prior to reading the book, I thought it unlikely that an analysis of poker strategies would provide insightful analogies to trial advocacy skills, skills that could not be obtained direct inspection.

What do poker players have in common with trial lawyers, anyways? Succinctly, each has to solve the game theoretic question: "if he knows, that I know that he knows ...". The poker player has to solve this problem in connection with what the other players believe they know about his hand, what he believes they know about what he believes about their hands, and other various permutations. The trial lawyer has to solve this problem in connection with what the cross-examination witness believes what the lawyer knows about the facts, what the lawyer believes the cross-examination witness knows about the facts, and what the cross-examination witness believes about what the lawyer believes that the cross-examination witness knows about the facts, and other various permutations. The poker player is at advantage since there is a set of facts which will soon be revealed: at trial, there are no sets of facts to be revealed until the Judge determines what facts there were.

If analogical explanations work, as a opposed to direct explanations, then the analogy must provide a quicker access to the problem. One might complain, and this would be a superficial complaint, that the trial examples must be easier to understand than the poker examples because we are all potential jurors, but few of us are potential poker champions. For example, in the beginning of the chapter on "Controlling the Opposition", Lubet describes the Johnny Cochrane gambit at the O.J. trial and the infamous glove scene and compares it with an example of "slow play". After reading the two together, I was intially puzzled. I understood Cochrane's move, but I really had to work hard at understanding the poker gambit. How as a lawyer could I learn a trial advocacy point from a difficult poker problem, when I comprehended the trial example directly?

Well, after working through the poker example, I realized that I had only superficially understood the trial advocacy gambit, and not appreciated all of the elements and what Christopher Draden should have been wary of.

Let me first review the poker example on slow play on pages 86 to 87, hardcover version. Lubet recounts the story of Monty, a player who played hands only on their expected value, against a fellow named Solcum, a wealthy banker's son.

They were playing 5 card draw, one hidden card and four exposed cards, with four rounds of betting.

Round 1: M: Shows 7 S: Shows 7

M makes a $5 bet

Round 2: M: Shows 7 7 S: Shows 7 A

M bets $10, S raises $20, and M calls.

Round 3: M: Shows 7 7 5 S: Shows 7 A 10

M checks, S bets $50, and M calls.

Round 4: M: Shows 7 7 5 Q S: Shows 7 A 10 10

S bets $100, and M raises $1500.

What would you think that if you were S and your hidden or hole card was an A, giving you the highest possible two pair? How would you analyze what M's bet was telling you? Assume that M and S know that it is not possible for S's hole card to be a 10, since the two other tens had shown.

Well, I would react, and not think, that M had picked up his queen and had queens and sevens, which would lose to my aces and tens. M bet small and didn't raise because he feared but didn't know I had an Ace, but when M hit his big cards, he beat big. I would call the raise and rake in the pot.

I would lose, M had the last 7. I lost because I looked only at the last round of betting to see what "information" it revealed. I probably heavily discounted the possibility that M had the last 7, and so "knew" I had a lock. (In case it isn't obvious, I am dead poor average player in a good game.) What did the betting in round 2 show, given that M only plays on with hands that he has an advantage with? If S knew that M knew that S's hole card was an A, should S believe that M would fold? Yes. And M didn't fold or bark in the night. Therefore, M had a hand that beat a pair of Aces, in round 2. The only hand possible was three sevens.

But would you have been disciplined enough to fold your hidden pair of Aces? Not me.

Turn to the trial problem. Should have Christopher Draden known that Johnny Cochrane knew that glove wasn't going to fit?

Don't know - but the point of the poker example, having worked it through, is this: did Christopher Draden ever stop to question whether Johnny Cochrane could know that the glove wasn't going to fit? Not such a stretch, when you ask the question. What did Cochran know about the glove, given his daily interactions with accused? Darden should have stopped to think about the relative asymmetry in knowledge, made a few deductions, before forcing the play on.

I look forward to sharing with you more of my experiences with this neat little book.

Posted by michael webster at 1:12 PM | Permalink | Comments (0) | TrackBacks (1)

Daniel Gilbert writing about the emotional pain on discovering that you have been defrauded, at Stumbling on Happiness, says:

"It was 1997, and the man who was crouched on the sidewalk at 68th and Broadway in New York City was one of the most pathetic souls I'd ever seen. His limbs were twisted in what appeared to be arthritic agony and tears were streaming down his face. "Please," he whimpered. "Please, somebody help me."

Most passers-by did what they were named for, but my wife and I stopped. The man looked up. "Please," he sobbed. "I just want to go home." My hand needed no guidance from my brain as it reached into my wallet and extracted $10. "Thank you," he said as I handed him the money. "Thank you so much." My wife and I mumbled some embarrassed words and walked on.

We hadn't gone a block when she tugged my sleeve. "Maybe we should have gotten him into a cab," she said. "He could barely stand up. He might need help. We should go back to see." My wife is the patron saint of lost kittens and there is no arguing, so we went back to see. And what we saw was our horribly crippled friend walking briskly and happily up 68th Street, opening the door to a late-model car, getting in and driving away after what was apparently a short day of theatrical work.

I know two things now that I didn't know then.

First, I now know that my hand did what human hands were designed to do. Research suggests that we are hard-wired with a strong and intuitive moral impulse -- an urge to help others that is every bit as basic as the selfish urges that get all the press. Infants as young as 18 months will spontaneously comfort those who appear distressed and help those who are having difficulty retrieving or balancing objects. Chimpanzees will do the same, though not so reliably, which has led scientists to speculate about the precise point in our evolutionary history at which we became the "hypercooperative" species that out-nices the rest.

The second thing I know now that I didn't know then is that this was the most damaging crime I had ever experienced. Like most residents of large cities, I'd been a victim before -- of burglary once, of vandalism several times. But this was different. The burglars and vandals had taken advantage of my forgetfulness ("Why didn't I double lock the door?") and taught me to be better.

But the actor on 68th Street had taken advantage of my helpfulness and taught me to be worse. The hand that had automatically reached for my wallet had been slapped, and once slapped was twice shy. I've never again given money to a stranger without scrutinizing him for the signs that distinguish suffering from its imitation. And because I don't know what those signs are, I typically just walk by." (my emphasis)

Gilbert's personal observation about the damage con criminals cause is consistent with every interview I have had with my own clients. The pain of being forced to reconsider social bonds at every economic transaction is far worse the we ordinarily imagine. We heal from bruises, we replace lost property. But to be forced outside of society's natural bonds for no reason other than a chance encounter with a psychopath is one cruel cut.

Posted by michael webster at 10:44 AM | Permalink | Comments (0) | TrackBacks (0)

Robert L. Park's book on Voodoo science has a great deal of wisdom to offer to the prospective franchisee or distributor and their investigations about the income generating opportunity. In Science, the "no free lunch rule" from the social world is recast as "conservation of energy", or "you cannot get something for nothing".

Instead of the income generating opportunities that promise an endless source of residual income for no work, in the scientific world we have an parade of perpetual motion machines. Dr. Park writes fluidly about some of these characters, Joe Newman, Cold Fusion, and James Patterson. He also maintains a website here.

Dr. Park has an excellent insight about what the attraction is to these hare-brained schemes. I want to flesh this out in some detail because it demonstrates an important flaw in our reasoning methods. Dr. Park discusses the case of Randell Mill's BlackLight Power, one of the Cold Fusion castoffs. Despite having a theory in which there was "a state below ground state", Mill's company got funding from two utility companies for a total of $10 million. According to Dr. Park, in a conversation with the business editor of the Princeton Packet, "The woman listened ... and asked 'But isn't possible that the laws of physics are wrong in this case, and Randell Mills is right?' ... A better way to phrase the question is 'What are the odds that Randell Mills is right?' To a very high degree of accuracy, the odds are zero. It's Pascal's wager, again." (my emphasis)

What is Pascal's wager, and why is it relevant? It a nutshell, it is the type of argument that runs like this: well, I know that A is highly unlikely to be true, but if I only invest a small amount $Z, the pay-off might be huge.

What is wrong with this form of argument, and if it is wrong or a fallacy, why is it an attractive fallacy?

People are very poor at strategic reasoning, contemplating how to act in a universe that is planning to react to their choice. Consider the following two bets or games, where the numbers represent dollars returned.

How much would you pay to play G1 and how much you pay to play G2, given that you know nothing about the probabilities of S1 and S2? You might reason this way. Well in G1, if I played A and S1 and S2 were equal, then I would get on average at little less than $50, while in G2 I would get about 50 cents. So probably G1 is worth at least 90 times more than G2. Whereas, I might pay very little to play G2, I might spend much more to play G2.

As attractive as this line of reasoning is, it is false if we assume that whatever is choosing S1 or S2 is watching you make your choice, ie a market. The zero sum value of G2, is -25 cents. But the value of G1 is -1 cent! G1 is not even a profitable game to play, despite that lovely looming left hand corner in which you get a return of $100. Why isn't G1 valuable? In a zero sum game, where people are trying to outwit you, S2 is going to be the state of nature in proportion to S1 in the exact ratio of 101:1. S2 is going to played to limit your gains to zero, and S1 will be played rarely -but positively just in case you always played B.

This is what trips people up: in a zero sum game, once you have the pay-off matrix, you have an excellent estimate of the states of nature. But in a decision theoretic version of the problem, the probabilities for the state of nature are not dependent on the pay-off matrix. Reasoning as if they are produces errors in judgment.

Technorati Tags: cold fusion, dr park, voodoo science, james patterson, perpetual motion machines, blacklight power, ground state, residual income, robert l park, endless source, free lunch, joe newman, conservation of energy, randell, franchisee

Posted by michael webster at 8:37 PM | Permalink | Comments (0) | TrackBacks (1)

In your dealings with franchisors or business opportunities sellers, you may come across what Robert D. Hare PhD described his book "Without Conscience" as the "White-Collar Psychopath". He describes them as "trust-mongers", who "having obtained our trust, ... betray it with stunning callousness."

Hare describes in detail a number of interesting cases. But the one that is most interesting, is the case of a man who became the Man of the Year and member of the Republican Executive Committee in the small town in which he lived.

He decided to run for a position on the local school board, and a reporter then looked into his background.

The reporter found this. "Not only was the man a complete imposter, ..., the man had a long history of anticocial behavior, fraud, impersonation, and imprisonment."

Of course what is the most remarkable fact here?

Technorati Tags: local school board, local community, republican executive committee, psychopath, imposter, impersonation, betray, imprisonment, outrageous, business opportunities, conscience, react, phd, remarkable, stunning

Continue reading "White Collar Psychopaths" »

Posted by michael webster at 2:22 PM | Permalink | Comments (0) | TrackBacks (0)

Earlier I had written about Steven Lubet's book "52 Lessons that Lawyers can learn from Card Players" as providing interesting examples about how poker players resolve recursive reasoning: what should I do if I belive that he believes that I belive, etc. (The use of "etc." is intentionally misleading becuase there is no single series of reasoning.)

I did not address the ethical aspects of Steven's book, but there is now an interesting discussion at the legal ethics forum blog.

As an aside, at a game theory conference I attended one of the game theorists suggested that poker was easy because all you had to was play "minmax", or the best response to the best response. What he meant was that it was easy to play pot odds; only play if the expected value of winning the pot exceeded the bet. It is a credit to poker analysis that Steven Lubet clearly explains the limits to this strategy: only works in games with risk seeking players.

Recall Steven's summary of good poker play:

First, play the early part of your hand aggressively in accordance with the objective odds of winning, pot odds, and the feel of the local game. Second, play the later part of the game very tight, but on pots that involve small bets, get caught bluffing to obtain information and to establish your reputation for playing in a certain manner.

Here are some examples which flesh out these contrary recommendations. Early on in the game, if you hold a weak hand, you can bet as if your cards are strong, if you believe that most of the players will stay in. It depends upon where you are sitting, but if you play a 9 7, no suit, you can draw a flop which makes it worthwhile at pot odds; the objective chance of winning, to play again. If you played this weak hand like a weak hand all the time, you would miss out on the part of the decision tree in which you flop a either a 4 or 5 straight. You must build the pot , in the right position, to benefit from that outcome.

In the other example, late in the game after the river, sometimes it makes sense to call against what appears to a winning hand, in a low betting game, to establish your reputation as "bluffer" and also to buy information.

Now, I agree with Steven Lubet's general analysis of the cognitive skills needed to analyze poker and that these skills are important for lawyers. But here is the ethical question that I am not sure of.

Technorati Tags: poker players, game theorists, game theory, i belive, ethics forum, legal ethics, pot, bet, minmax, expected value, recursive, resolve, odds

Continue reading "Poker as an Ethical Model for Laywers" »

Posted by michael webster at 10:33 PM | Permalink | Comments (0) | TrackBacks (0)

Almost 25 years ago, J. Edward Russo and Paul J.H. Schoemaker wrote "Decision Traps: The Ten Barriers to Brilliant Decision-Making and How to Overcome Them". I believe that the book is out of print, but there are plenty of used book sellers who have it. Two of their decision traps are particularly prevalent amongst business opportunities or distributorship purchasers: a) overconfidence,"failing to collect key factual information because you are too confident in your assumptions and opinions., b) shortsighted shortcuts, relying inappropriately on "rules of thumb" such as implicitly trysting the most readily available information or anchoring too much on convenient facts."

Here is how these two decision traps end up cost purchaser a great deal of money. A person will attend a trade show and see an admittedly neat idea: it may be a new internet kiosk or atms located in casinos. The individual will self generate a great deal of excitement about the opportunity, forgetting that over optimism is only required for implementing a well researched out decision,and is no substitute for careful, skeptical and through examination. Being over confident can be a good thing, but only after you have been more than skeptical, asked all the right disconfirming questions, and identified and removed the anchors in your assumptions.

Given this, does the the new FTC rule help, hinder, or is neutral with respect to purchasers of business opportunities?

Technorati Tags: traps, used book sellers, internet kiosk, admittedly, rules of thumb, neat idea, distributorship, anchoring, atms, purchaser, prevalent, russo, shortcuts, assumptions, business opportunities, casinos, excitement, confident, brilliant

Continue reading "Decision Traps and Due Diligence" »

Posted by michael webster at 4:02 PM | Permalink | Comments (0) | TrackBacks (0)

Frank W. Abagnale's book "The Art of the Steal" is best when it focuses on personal identity theft and how to protect against it. While the book does discuss frauds in general, such as ponzi schemes, investment fraud, and business opportunity fraud, there is not a great deal of detailed insight about these schemes.

But with personal identity theft Abagnale has a real feel for how the social world of the internet has increased our desire for immediacy of transactions with the consequent loss of privacy. There is an important tradeoff between our economic interest in doing business in faceless transactions and our privacy. Abagnale counsels a very strict program of privacy protection, including shreding personal mail and using only one time credit cards over the internet.

Besides this counsel, there is an interesting fact, relevant to business opportunity due diligence, apparently from the period 1995 - 2000, the SEC was only able to collect 17 cents on the dollar for every investment scam. The FTC's numbers for recovering real money from business opportunities fraud is lower than this.

So if you are investing $10,000 in a business opportunity, why wouldn't you spend $400 to find out whether you are going to lose all but 17% of your investment? My estimate of $400.00 is what it would take to write all the state regulators and collect information about the biz op. Generally, these letters would reveal that the biz op seller is not registered - the number one sign for fraud. Until biz ip purchasers become as serious about investigating the seller as Abagnale wants us to be about protecting our own personal identity, biz op fraud will continue.

Technorati Tags: personal identity theft, personal mail, business opportunity fraud, ponzi schemes, privacy protection, abagnale, investment fraud, due diligence, tradeoff, immediacy, frauds

Posted by michael webster at 9:32 PM | Permalink | Comments (0) | TrackBacks (0)

James Walsh wrote this book in 1998, which is a pity since I would have liked to hear his views on the recent big market ponzi schemes and their meltdown. The book is organized into four sections: how the schemes work, why the schemes work, contemporary extensions, and what to do if you have been scammed.

It is an ambitious book, departing from the usual fare by attending to what specific legal remedies may be available to the individuals who find themselves a part of a ponzi scam. The list of remedies, regulatory action, recevierships, and suing the third party enablers is a good checklist. There are specific jurisdictional remedies that Mr. Walsh overlooks - for example, in Canada one might argue that the ponzi corporation is being run in a fashion by the directors so as to oppress it investors/shareholders. Sometimes, you need to use the legal difference between the corporation and its directors -that they are two different legal entities- as a way of creating legal obligations.

For example, in a nice discussion on third person liablity for receiving money from a ponzi scheme, Walsh points out that a number of courts have found that the players who take out or get paid out from a ponzi scheme are not liable to the rest of the group on theory of negligence, but they may be liable on a theory of restitution. Should the "investors" in a failed ponzi scheme have to repay their "profits"?

Many courts dealing with these issues cite the 1985 federal court decision Johnson v. Studholme as a standard of basic fairness. In the wake of a failed Ponzi scheme, the receiver filed lawsuits against those investors who had received amounts in excess of their contibutions (not just "within" the previous year).

The Johnson court ruled that the investors had given value for the profits they'd received and, so, had not received fraudulant conveyances. The court held that the capital contributions made by the investors and the risk that they could lose all or part of it had been the value provided.

The payment of illusory profits is not a fraudulant conveyance because the capital payment might have been lost, but the operation of a ponzi scheme is always an oppression by a minority of investors on the majority of investors - it is designed to transfer a large amount of wealth from the many to the few. As such, in Canada, it might be recognized as an act of oppression under the Corporation laws, both federally and provincially.

In conclusion, this is a very interesting book on ponzi fraud which will no doubt repay interested readers.

Technorati Tags: ponzi schemes, legal entities, ambitious book, james walsh, enablers, meltdown, suing, legal remedies

Posted by michael webster at 11:03 AM | Permalink | Comments (0) | TrackBacks (0)

Dennis Marlock's book entitled "How to Become a Professional Con Artist" is an insightful discussion about the psychology of fraud, from a retired police officer. Here are the discussions I found useful.

What do advertisers, scam artists, and professional magicians all have in common? According to Marlock, "even when you know the magician is about to deceive you, seldom are you aware of how the deception worked. Thanks to some misdirection, ample amounts of showmanship, lies of omission, the obvious is overlooked." The obvious in a business opportunity fraud is that you will pay, for example, $5000.00 for a $200 product which may or may not work, for non existent locations.

Marlock suggests also that the victims of fraud share some common characteristics: a) millions of Americans dream of a path to easy riches, b) the con artist plays upon the ordinary American's sense that their life is humdrum and banal, c) when given a choice most people will believe what is comfortable to believe, d) even though most people can think, most of the times they won't, and f) if you can bring out the greed demon in a person, you can get him to believe just about anything.

This is a useful intenal checklist when you find yourself reviewing a business opportunity, which appears to have generated uncontrollable or excessive enthusiasm.

Technorati Tags: business opportunity fraud, con artist, professional magicians, scam artists, showmanship, banal, magician, omission, police officer, insightful, psychology

Posted by michael webster at 3:22 PM | Permalink | Comments (0) | TrackBacks (0)

Approximately 10 years ago, Chuck Whitlock wrote up his experiences exposing scams, frauds and cons. There are two important stories that Whitlock wrote about which are pertinent to due diligence for business opportunities. First, he describes giving a lecture at a business opportunity trade show explaining how individuals could get material information from the local state authorities which regulate business opportunities. He states "some opportunities are only opportunities for con artists to rip you off." One audience member was very attentive and asked Whitlock a number of questions. After his talk, Whitlock donned a disguises and started hawking a franchise for Platinum 1000 - a light bulb that never burns out. Whitlock collected $14,000 in a few hours and that attentive member for the audience? Buyer..

The second story may surprise readers. Whitlock attended a seminar which was promoting an illegal pyramid scheme promoted by a company called "Gold Corp". A Linda Chapman was presenting this wonderful opportunity and Whitlock was appalled by how many people were falling for the pitch, since it was an obvious pyramid. (Whitlock had done some previous research on the company prior to attending the seminar.) Whitlock jumped to his feet and exposed the scam. The crowd went wild - but, they were angry with Whitlock! He had stolen the fig leaf off this fraud, but everyone desperaedly needed to believe that this was "the one for them". As Cialdini eloquently explained in his book, for these individuals the disclosure of true and material facts just made them act irrationally quicker!

What do these two examples show about the FTC's proposed Business Opportunities Rule?

Technorati Tags: illegal pyramid scheme, whitlock, audience member, business opportunities, due diligence, pertinent, business opportunity, light bulb, con artists, surprise readers, gold corp, opportunity trade, state authorities, disguises, frauds, hawking, scams, regulate, rip

Continue reading "The FTC's Proposed Business Opportunities Rule Part II" »

Posted by michael webster at 6:53 PM | Permalink | Comments (0) | TrackBacks (0)

The Yellow Kid was reputed to be one of the master con criminals between 1900-1950, who allegedly masterminded criminal confidence games which raked in millions of dollars. As told by W.T. Brannon, Yellow Kid's exploits demonstrate a shrewd understanding of the streak of larceny that runs in a man's heart. Fixed horse races seemed to have captivated the general public, who were often looking to capture a piece of the action - something for nothing.

Many of the Kid's short cons involved purporting to sell inside information, sell after a fashion. In one fraud, the Kid and his accomplice stole money in the following manner. The Kid's accomplice had a fake newspaper which showed the Kid as a big time successful horse race gambler. The accomplice's job was to introduce the mark to the Kid. Graciously, for a big time gambler, the Kid would engage the mark in superficial talk but gradually confirm the mark's thought that "why, horse races are fixed, after all". But since the Kid could not betray his sources and give the mark a sure fire tip, he could however "allow" the mark to place a bet with him for the fifth or sixth race, say of a mere $5,000.

Are such shorts cons a part of our distant past?

Technorati Tags: horse races, horse race, accomplice, yellow kid, confidence games, gambler, fake newspaper, brannon, larceny, shrewd, exploits, criminals, stole, fraud, fashion

Continue reading "Horse Racing Fixes, Faxes and Frauds" »

Posted by michael webster at 6:05 AM | Permalink | Comments (0) | TrackBacks (2)

I had previously written about the book Weapons of Fraud based upon the testimony of one of the authors, Anthony Pratkanis before the US Senate Special Committee on Aging. The book is free from the AARP and I can recommend it highly. The authors have taken considerable time and trouble to identify how we fall victim to fraud with reference to actual scripts of conversations confiscated from criminals convicted of fraud. The book also comes with a CD so that the actual conversations, some of which are chilling, can be heard.

The authors have made a serious effort to inform the public about how financial fraud is committed and emphasize that we are all possible targets for these con criminals, which is the authors' replacement term for "con artists". It amazes me that while everyone believes that they could be the target of a physical crime and will sometimes go to great lengths to protect their property, the same people believe that their own "common sense" will protect them from a financial or white collar swindle. Criminals take your money because they can and rationalize that if you cannot "keep" your money, then they deserve to take or have it.

The introductory chapters discuss how criminals obtain information, and profiles on their targets. They state that at the basis of every scam is the "phantom dream". "A phantom is something that a person desperately wants, but is normally completely unavailable - the hope of things unseen being real." (my emphasis). The criminal's pitch is he can make this phantom dream come true for you - you just need to believe, let him help, and you too will can join thousands or even millions already enjoying their dreams.

The concept of the phantom dream is a useful analytic device. But it is not just used by criminals, both franchises and business opportunities are often marketed as the opportunity to "be your own boss". For franchising, this is highly amusing given the highly restrictive adhesion contracts that franchisees sign.

But what is wrong with having a dream, even a phantom dream? Don't we want our reach to exceed our grasp? Isn't overreaching an admirable trait? What is wrong with desiring what is normally completely unavailable and shoot for the moon?

Technorati Tags: financial fraud, authors, us senate, target, aarp, senate special committee, criminals, conversations, con artists, chilling, common sense, emphasize, aging, targets, anthony, weapons, scripts

Continue reading "Weapons of Fraud II" »

Posted by michael webster at 7:24 AM | Permalink | Comments (0) | TrackBacks (1)

Scott Plous, in 1993, wrote an excellent text or compilation of the then current state of the art on the Psychology of Decision making, and included a number of test exercises at the beginning of the text. The tricks of the mind that psychologists have discovered are very ably covered by Plous. There is a general agreement amongst scientists is that there are heuristic tools that we use to break down a decision problem, which generally work well. But we overuse these heuristics and make predictable mistakes.

Here is an example about the use of testimonials to aid our decision making. If I am going to buy a new computer, I will generally read product reviews, especially from authorities. Some of these reviews provide important information. When the "discovery" of a Mac OSX virus was a hot topic, reading authoritative reviews helped my understand what the problem was and how to gain protection until Apple released its security update. In general, relying upon authorities is a good idea and trying to identify an authority is a worthwhile exercise.

Where is this a bad strategy is when the event you are seeking information about is highly unusual, rare, or wildly out of the norm. How important are authorities in these cases? Consider the following problem. You are a member of jury in personal injury lawsuit. The plaintiff has testified that the car that hit him was yellow. Let's make the plaintiff an "authority" on spotting cars: if a car is yellow, then the plaintiff will correctly identify it as yelllow 90s% of the time. Further suppose that there are only two colors of cars: yelllow and green. Our authority is just as good as spotting yellow cars as green cars. You also know the total number of cars is 200, and 180 are green. What are the chances that if the plaintiff says that the car was yellow, it was yellow, given that he is an authority. Well, let's count the cases.

From the population totals, we know that A + B + C + D = 200, and that A + B = 20, while C+ D = 180. We also know that our authority doesn't make mistakes very often, so that A/A+B = .9, or A= 18 and B =2. Similarily, we know that C/C+D = .9, so C = 162 and D =18. What is the universe or total collection of cars and identifications in which our authority says that the "car was yellow". It is the information state containing A and D, a total number of 36 different states. Only in half of those states, A, does our authority get it right despite his 90% ability. This is because the chances of getting a yellow car are small, 20/200. So when our expert identifies a yellow car, he has picked a relatively rare event to be right about. As David Hume said, and I paraphrase, when presented with testimony as to a very rare event, I have to judge whether the rare event happened or that testifier has made some mistake.

What does this have to do with magic gas pills?

Technorati Tags: hot topic, authoritative reviews, heuristic tools, test exercises, mac osx, gain protection, topic reading, psychologists, new computer, predictable, compilation, state of the art, scientists, psychology, testimonials, discovery, heuristics, product reviews, scott plous

Continue reading "Testimonials, Covariation Tables and Magic Pills" »

Posted by michael webster at 8:24 PM | Permalink | Comments (0) | TrackBacks (1)

This book is apparently free to residents of the State of Washington, but I am sure that if you write the AARP directly you could obtain your own copy. Both Washington and Connecticut have been in forefront of fighting business opportunties fraud and scams. Business opportunties which have to be registered in Connecticut are available online here. It is unfortunate that more state securities regulators don't follow the lead of Connecticut and publish the business opportunities sellers that have to be registered - it could prevent frauds and scams.

Posted by michael webster at 10:14 PM | Permalink | Comments (0) | TrackBacks (3)

"accounting trickery is used to cover up problems that are there or to inflate earnings and make it look like the company is making more money than it really is. And greed comes in of course-accountants put a positive spin on things to impress investors and keep the stock price up."

Continue reading "Financial Shenanigans and Fraud" »

Posted by michael webster at 8:51 PM | Permalink | Comments (0) | TrackBacks (0)

Virtually all of our laws dealing with fraud presume a model of the rational actor, who with better and more accurate information will see through frauds and scams. This is simply not true, at least for many of the people who need the protection of the law. At times in our lives, we all need to believe in something. Scams and frauds hook innocent, reasonably intelligent people just at these times. Providing more information to people which robs them of hope may only push them faster into making an irrational decision.

Posted by michael webster at 4:19 PM | Permalink | Comments (0) | TrackBacks (3)

Donald Dunn's book on Charles Ponzi is a terrific read! A terrific read several times over, as I am now finishing it for the fourth time. The work repays careful re-reading, and it is almost a shame that it reads so engagingly on first impression, because one may not re-read it. I savoured the psychological insights into how Ponzi made this classic fraud work.

What was also intriguing was the explanation of Ponzi's understanding of how to manipulate credit reputation and the psychology of bank runs combined with his understanding of how to use the bankruptcy laws, as described in the early chapters. I had not realized the extent to which Ponzi had attempted to undermine the banking industry, both in Montreal and Boston. (This is why I hold that there is no significant difference between Enron and Ponzi, except as a matter of scale. Although with Enron there was a real company; but the cheat remains the same: lie to your creditors about the extent of the viability of your business scheme.)

What can we learn today from Donald Dunn's book?

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Posted by michael webster at 8:50 PM | Permalink | Comments (0) | TrackBacks (3)