Why do individuals respond to fraudulent scam communications and lose money? The psychological determinants of scam compliance

Authors: Peter Fischer, University of Regensburg; Stephen Lea, School of Psychology at University of Exeter; Kath Evan, School of Psychology at University of Exeter

Publication: Journal of Applied Social Psychology

Year: 2013

Focus Area: 2000 to Present, Consumer Behavior, Emotion/Motivation, Persuasion Methods

Relevance: Scams use a variety of persuasion tactics to convince their targets to comply. Victims respond differently than non-victims to these messages. High values of the promised reward and trust in the message are very important in convincing people to comply.

Summary: Using a mixed methods approach, this paper presents the results of three separate studies. The first study involved qualitative interviews with scam victims, the second study was a questionnaire completed by victims and non-victims, and the third study investigated scam framing effects and the impact of other motivators on interest in the scam.

  • In the 23 victim interviews, the main questions were: Why did participants react to the scam.What did they think and feel? And what were their motivations and behaviors? Results showed that over 87% of interview transcripts included words relating to (a) cues associated with positive emotions; (b) cues of trust; (c) cost–benefit considerations; and (d) words trying to prompt behavioral commitments.
  • In the second study, potential subjects were mailed a questionnaire that included a list of statements that would be typical of people who were vulnerable to four different kinds of psychological processes associated with decision errors. Respondents were asked to indicate how far they agreed with them. Results showed that the primary factors associated with becoming a scam victim or near victim are affected by the high values of the rewards offered, and showing a high degree of trust in the scammers. High motivation, positive emotion, self-confidence, and lower belief in personal superiority are also predictive of scam vulnerability.
  • In the third study, respondents were presented with a simulated postal scam that was enclosed with a questionnaire asking for their reactions to it. They manipulated variables such as high motivation (varied by manipulating the amount of money offered in the scam), positive emotion (varied by including or omitting triggers to contemplate how receiving the money would make the recipient feel), and trust (varied by including or omitting conventional symbols of authority). They also manipulated the format in which the simulated scam was sent out–either the scam flyer was enclosed in the envelope such that it would be seen first when the letter was opened, or it was bundled inside the questionnaire and not seen until later.

Author Abstract: Why do so many people all over the world, so often, react to completely worthless scam offers? In two questionnaire studies, one of which included the distribution of an experimentally manipulated simulated scam,we investigated differences between respondents who did and did not report past compliance with scams. We found that the principal differences were in their response to very high-value incentives, in the extent to which they reacted with positive emotions to the thought of winning a large prize, in their reliance on signs of official authority, and in their self-confidence. The first two of these can be regarded as forms of visceral processing. Some of these differences suggested a dispositional difference between victims and non-victims.

Caught in the Scammer’s Net: Risk Factors that May Lead to Becoming an Internet Fraud Victim, AARP Survey of American Adults Age 18 and Older

Authors: AARP: Doug Shadel, Karla Pak, and Jennifer H. Sauer

Year: 2014

Focus Area (s): Victim Profiling, Fraud Surveys, Consumer Behavior, Prevention Techniques

Relevance: Identifying risk factors for being victimized by internet fraud may help identify and protect those who are most vulnerable.

Summary: This multi-state survey of over 11,000 individuals age 18 and older sought to answer three questions:

  1. Are there behaviors and life experiences that may increase a person’s risk of becoming a victim of online fraud?
  2. What proportion of individuals may be at risk of being victimized by online fraud?
  3. How concerned are Americans about online fraud and what if any steps are they taking to protect themselves?

Key findings include:

  • Nearly one in five Americans (19%) who use the internet, or as many as 34.1 million people, engage in at least 7 of the 15 behaviors or experience life events that may put them at increased risk of being victimized by online fraud.
  • Two-thirds of Americans (65%) who use the Internet, or as many as 116 million, people received at least one online scam offer in 2013.
  • Nearly eight in ten (79%) Americans who use the Internet are concerned about being scammed on the Internet.

First Paragraph: A new AARP survey finds there are 15 particular behaviors, life experiences, and knowledge attributes that may make a person more vulnerable to online fraud. Data from this national and multi-state survey of over 11,000 online users also shows that Americans are very concerned about online fraud, yet many avoid taking basic precautions to protect themselves.

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Consumer Fraud in the United States, 2011: The Third FTC Survey

Title: Consumer Fraud in the United States, 2011: The Third FTC Survey

Author: Anderson, Keith B.

Publication:  Staff Report of the Bureaus of Economics and Consumer Protection, Federal Trade Commission

Year: 2013

Focus Area: Prevalence, Victim Profiling, Fraud Surveys

Relevance: Surveys of fraud prevalence in the United States help define the scope of the problem and allow enforcement agencies to tailor their prevention and education efforts. The FTC Survey is one of the most comprehensive surveys of fraud-related information.

Summary: This report details the findings from the third survey commissioned by the Federal Trade Commission to examine consumer fraud in the United States. The survey was conducted from late 2011 to early 2012.

Consumers were asked questions designed to learn whether they had been victims of specific types of fraudulent transactions.  The survey also provides information about the mechanism through which the fraudulent transaction occurred.  Finally, the survey investigated the relationship between certain demographic characteristics and the likelihood of fraud victimization.

Key findings include:

  • During 2011, an estimated 25.6 million adults (10.8 percent of the adult population) were victimized by fraud.
  • The top 5 fraud categories were:
  1. Weight-loss Products (estimated 5.1 million victims)
  2. Prize Promotions (estimated  2.4 million)
  3. Unauthorized Billing for Buyer’s Club Memberships (estimated  1.9 million)
  4. Unauthorized Billing for Internet Services (estimated  1.9 million)
  5. Work-at-Home Programs (estimated  1.8 million)
  • The Internet was the most common way victims first learned about offers that turned out to be fraudulent and the most common way orders were placed.
  • High school graduates were the least likely to have been victimized by fraud.
  • Survey respondents who were more willing to take risks, who recently experienced a negative life event, and who had more debt than they could handle were more likely to have been victimized by fraud.
  • In general, consumers age 45-54 were the most likely to have been victimized by fraud. Those under age 45 were somewhat less likely to have been victimized than those 45-54, and those 55 and over were the least likely to have experience fraud.  However, those between 55 and 74 had the greatest chance of being victims of fraudulent prize promotions.

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A neuropsychological test of belief and doubt: damage to ventromedial prefrontal cortex increases credulity for misleading advertising

Authors: Erik Asp , Kenneth Manzel, Bryan Koestner, Catherine A. Cole, Natalie L. Denburg, and Daniel Tranel (University of Iowa)

Publication: Frontiers in Neuroscience

Year: 2012

Focus Area(s): Aging, Decision Making, Consumer Behavior

Relevance: Understanding the neural pathways that underlie belief and doubt offers neuroanatomical insight as to why older adults may be more vulnerable to fraud.

Summary: This article studies brain damaged participants in order to explore the neuroanatomical mechanisms that render individuals susceptible to misleading information. According to the False Tagging Theory (FTT), a theoretical model of belief and doubt, all ideas are initially believed to be true and doubt occurs only when the prefrontal cortex “tags” cognitive representations with false value. The authors of this study suggest that the ventromedial prefrontal cortex (vmPFC) is particularly important for false tagging, such that damage to this area of the brain causes a “doubt deficit” that results in greater credulity.

To test this hypothesis, the researchers showed three groups of participants (18 patients with vmPFC damage, 21 patients with brain damage to other areas of the brain, and 10 participants with no brain damage) several misleading advertisements and tested their belief in the ads, and their intent to purchase the advertised items. The study found that patients with vmPFC damage were much more likely to believe false advertisements and had the highest purchase intention of all three groups.

The  vmPFC tends to disproportionately lose integrity and functionality in old age; thus, the researchers suggest that vulnerability to misleading information and fraud in older adults is likely the result of a damaged “doubt process” mediated by the vmPFC. This finding may enable caregivers and relatives to be more understanding of decision making by older adults.

Author Abstract: We have proposed the False Tagging Theory (FTT) as a neurobiological model of belief and doubt processes. The theory posits that the prefrontal cortex is critical for normative doubt toward properly comprehended ideas or cognitions. Such doubt is important for advantageous decisions, for example in the financial and consumer purchasing realms. Here, using a neuropsychological approach, we put the FTT to an empirical test, hypothesizing that focal damage to the ventromedial prefrontal cortex (vmPFC) would cause a “doubt deficit” that would result in higher credulity and purchase intention for consumer products featured in misleading advertisements. We presented 8 consumer ads to 18 patients with focal brain damage to the vmPFC, 21 patients with focal brain damage outside the prefrontal cortex, and 10 demographically similar healthy comparison participants. Patients with vmPFC damage were (1) more credulous to misleading ads; and (2) showed the highest intention to purchase the products in the misleading advertisements, relative to patients with brain damage outside the prefrontal cortex and healthy comparison participants. The pattern of findings was obtained even for ads in which the misleading bent was “corrected” by a disclaimer. The evidence is consistent with our proposal that damage to the vmPFC disrupts a “false tagging mechanism” which normally produces doubt and skepticism for cognitive representations. We suggest that the disruption increases credulity for misleading information, even when the misleading information is corrected for by a disclaimer. This mechanism could help explain poor financial decision-making when persons with ventromedial prefrontal dysfunction (e.g., caused by neurological injury or aging) are exposed to persuasive information.

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The psychology of scams: Provoking and committing errors of judgment

Authors: Office of Fair Trading (prepared by University of Exeter School of Psychology)
Year: 2009

Relevance: We may make errors of judgment when we succumb to legitimate sales appeals. This work seeks to identify what particular errors lead to scam victimization.

    “[A] modest probability of falling for a scam is no longer an inexplicable exception to the general tendency of human choice, but rather an inevitable by-product of the processes that enable normal economic life to continue.” (p. 15)

Summary: This work includes an extensive literature review of scams (mass-marketed consumer frauds) and outlines four studies:

1. Extended interviews with scam victims

  • In addition to providing useful subjective feedback, these were also “text-mined” for psychological features that characterized victimization. For instance, most victims described perceived legitimacy and high reward in the scam ploy.

2. Text-mining scam communications

  • By categorizing the language of different scams, the researchers could identify key ploys typifying scams generally: appeals to trust/authority & visceral (vividly emotional) triggers referencing the future (“phantom fixation”).

3. Victim/Non-victim comparison – susceptibility to errors of judgments

  • “There was no evidence that any of the decision error propensities distinguished victims… from non-victims more effectively than others” (p. 121)
  • However, victims did report trying harder to understand scams than did non-victims. This counter-intuitive result may reflect non-victims reflex to discard promotional materials, rather than a careful attentiveness on the part of victims.

4. Scam simulation experiment – “hot” and “cold” conditions

  • By varying whether a mailed survey initially looked like a scam mailing (“hot” condition) or an innocuous mailing (“cold” condition), researchers were able to garner more direct feedback from people targeted by a “scam” – in this case from those who, by opening the mailing, had demonstrated interest in the ploy
  • Impact of $$: In the “cold” condition, respondents indicated that they would have been more likely to respond to the ploy when the prize was larger. In the “hot” condition, however, the manipulation cues were most critical.
  • The differences between conditions suggest that in-the-moment feedback may be particularly important when studying fraud and its victims.

First Paragraph: According to the Office of Fair Trading (2006), 3.2 million adults in the UK fall victim to mass marketed scams every year, and collectively lose £3.5 billion. Victims of scams are often labelled as ‘greedy’ or ‘gullible’ and elicit the reaction, ‘How on earth could anyone fall for that?’ However, such labels are unhelpful and superficial generalisations that presume all of us are perfectly rational consumers, ignoring the fact that all of us are vulnerable to a persuasive approach at one time or another. Clearly, responding to a scam is an error of judgement – so our research sought to identify the main categories of decision error that typify victim responses, and to understand the psychology of persuasion employed by scammers to try to provoke such errors.

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The Psychology of Consumer Fraud

Authors: Doug Shadel & Karla Pak

Publication: Doctoral Thesis

Year: 2007

Summary: This work provides a literature review of social influence (as it relates to consumer fraud) and consumer fraud victimization (including fraud’s prevalence, fraud types, and typical victim profiles).

It also introduces an undercover taping project identifying various persuasion strategies used by conmen.

  • Of 1,112 influence tactics coded across 128 transcripts, the most commonly-used tactic was “Phantom Fixation,” with 249 instances (p. 66). See page 67 for a chart of influence tactics by scam type.

The work also describes a series of fraud victim profiling studies, comparing known victims of fraud to non-victims. In so doing, it seeks to identify factors that predict victimization in two different types of fraud, while circumventing the problem of victim-denial.

  • Investment fraud victims are more likely to be financially literate, married, male, have a college degree or more, earn $35,000 per year or more, and are more open to persuasive appeals (p.157).
  • Lottery fraud victims are more likely to be female, widowed, living alone, earn less than $30,000 per year, be less financially literate, and “live for today” (p. 158)

The survey also found that many known victims were unwilling to acknowledge their victimization:

  • When asked simply, only 10-20% of investment victims and 14-56% of lottery victims would acknowledge having been defrauded, with the rate depending on the question phrasing (p. 150).
  • The secondary study of just investment victims was able to attain 62% acknowledgement using a series of progressive, investment-specific questions (p. 150).

The survey included 80 known lottery fraud victims, 80 investment fraud victims (9 self-identified), and 160 general population (self-identified as non-victims).

Author Abstract: This study was a three-part inquiry of consumer fraud. In part 1, undercover tapes of fraud pitches were analyzed to determine how con men pitch their victims. Tape analysis revealed con criminals customize their pitch to match the psychological profile of the victim and use a complex combination of influence tactics within each pitch to persuade. In part 2, a 72 question survey was administered to 80 victims of lottery fraud, 80 victims of investment fraud and 160 non-victims of fraud. Investment fraud victims demonstrated a better understanding of basic financial literacy than non-victims. Both investment and lottery victims were more likely to have experienced a negative life event unrelated to their fraud experience. Both victim types were more likely to listen to sales pitches from unknown sales persons. Investment and lottery fraud victims both dramatically underreport fraud. In part 3, a 2nd survey was administered to a different population of 125 investment fraud victims and 258 non-victims to determine if findings from survey 1 could be replicated. In fact, major findings relating to financial literacy were replicated, as were demographic, psychological and behavioral characteristics of investment fraud victims. In addition, new findings relating to “persuasion literacy” were found: victims of investment fraud were less able to identify pitch lines used by con men in fraud schemes than a non-victim population. This suggests that a key strategy for deterring fraud victimization in the future might be to teach both financial literacy and persuasion literacy to investors.

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Routine Online Activity and Internet Fraud Targeting: Extending the Generality of Routine Activity Theory

Authors: Travis C. Pratt, Kristy Holtfreter & Michael D. Reisig

Publication: Journal of Research in Crime and Delinquency

Year: 2010

Relevance: Routine behavior has been established as a reliable predictor of various forms of crime victimization.

Summary: Given the prevalence of fraud-related crime online, this study surveyed 922 Floridian adults (survey conducted in 2004-2005) explore the connection between relevant online behavior (such as online shopping) and the likelihood of online consumer fraud.

“Of all respondents, 2.5 per cent indicated they were the victim of Internet consumer fraud during the past year” (van Wilsem 2011; p. 5), with an estimated 300,000 people defrauded annually in The Netherlands (p. 7).

  • 15.2% of the Florida adults survey respondents described being targets of consumer fraud in the previous year (2004). (p. 11)
  • 3% of respondents reported being targeted via the internet.
  • “Younger and more educated individuals are significantly more likely to be targets of consumer fraud via the Internet.” (p. 16) but “the effect of education and age on Internet fraud targeting is fully explained by the number of hours consumers spend online and whether they make purchases from Internet Web sites.” (p. 16)
  • Accounting for age, education, and other demographic variables, “those who make purchases from Web site increase the odds that they will be targeted by cyber-fraudsters by 290 percent.” (p. 16)

Overall, consumer behavior online is a greater predictor of victimization than demographic characteristics. (p. 16)

Author Abstract: Routine activity theory predicts that changes in legitimate opportunity structures (e.g., technology) can increase the convergence of motivated offenders and suitable targets in the absence of capable guardianship. The Internet has fundamentally changed consumer practices and has simultaneously expanded opportunities for cyber-fraudsters to target online consumers. The authors draw on routine activity theory and consumer behavior research to understand how personal characteristics and online routines increase people’s exposure to motivated offenders. Using a representative sample of 922 adults from a statewide survey in Florida, the results of the regression models are consistent with prior research in that sociodemographic characteristics shape routine online activity (e.g., spending time online and making online purchases). Furthermore, indicators of routine online activity fully mediate the effect of sociodemographic characteristics on the likelihood of being targeted for fraud online. These findings support the routine activity perspective and provide a theoretically informed direction for situational crime prevention in a largely unexplored consumer context.

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Modeling the Underreporting Bias in Panel Survey Data

Authors: Sha Yang (Leonard N. Stern School of Business, New York & School of Economics and Management, China), Yi Zhao (J. Mack Robinson College of Business, Georgia), Ravi Dhar (Yale School of Management, Connecticut)

Publication: Marketing Science

Year: 2010

Focus Area: Impact, Research method development

Relevance: Surveys are used extensively to determine the prevalence and impact of financial fraud.  Given the sensitivity of the topic, it is also particularly prone to underreporting biases in surveys, as respondents are reluctant to admit their own victimization.  Determining this rate of underreporting is essential to untangling fraud’s actual social and economic impact.

Summary: While underreporting has been documented (Turner 1961, Waksberg and Neter 1965, Lee, Hu and Toh 2000) and modeled (Bailar 1975, Bollinger and David 1997) in other studies, this paper proposes a more sophisticated means of quantifying its impact.

  • By studying both reported behavior and partially observed behavior, the authors propose a mathematical modeling framework that determines who is underreporting, when, and how much.
  • This model allows collected information to be accurately interpreted, provides computation of true behavioral incidence, and identifies particular demographic and psychological characteristics that correlate with increased underreporting (such as sex, age, income, and motivation).
  • For example, in a study examining drinking habits (water and soft drinks), rates of underreporting varied with specific psychological and demographic characteristics (women reported less than men; those inclined to indulge reported less than those motivated by “looking good” and “health”).
  • By identifying factors that correspond with underreporting, the model highlights options to intervene in a targeted manner, and encourage full and accurate participation by respondents (such as incentives).

While this model is intended for longitudinal survey panel reporting, it has promise for similarly rigorous computational analysis of one-time surveys (commonly used to identify the rate of fraud).

Author Abstract: Panel survey data have been gaining importance in marketing. However, one challenge of estimating econometric models based on panel survey data is how to account for underreporting; that is, respondents do not report behavioral incidences that actually occur. Underreporting is especially likely to occur in a panel survey because the data-recording mechanism is often tedious, complex, and effortful. The probability of underreporting is likely to vary across respondents and also over the duration of the survey period. In this paper, we propose a model to simultaneously study reported behavioral incidences and partially observed actual behavioral incidences. We propose a Bayesian approach for estimating the proposed model. We treat those unobserved actual behavioral incidences as latent variables, and the Gibbs sampler makes it convenient to impute the nonreported consumption incidences along with making inferences on other model parameters. Our proposed method has two advantages. First, it offers a model-based approach to remove the underreporting bias in panel survey data and therefore allows marketing researchers to make accurate inferences about consumers’ actual behavior. Second, the method also offers a natural way to study factors that influence respondents’ propensity to underreport. Because we treat those underreported behavioral incidences as nonmissing at random, this underreporting propensity varies across respondents and over time. This understanding can help marketing researchers design the right strategy to intervene and incentivize respondents to authentically report and hence improve the quality of survey data. The proposed model and estimation approach are tested on both synthetic data and actual panel survey data on consumer-reported beverage-drinking behavior. Our analysis suggests that underreporting can significantly mask respondents’ true behavior.

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Fraud and the American Dream: toward an understanding of fraud victimization

Authors: Adam Trahan (Indiana University), James W. Marquart (University of Texas at Dallas), Janet Mullings (Sam Houston State University)

Publication: Deviant Behavior

Year: 2005

Focus Area: Profile

Relevance: By examining a single $19 million fraud and its victims in detail, this article serves as a case study of investment fraud.

Summary: This article uses the example of a Ponzi investment scheme to analyze the behavior and motivations of victims of fraud.  Based on a previous article relating the American Dream to perpetrators of crime, this theory provides a new sociological  perspective on fraud victimization.

The author emphasizes the role of “the American Dream” as capitalist drive:

  1. requires constant pursuit of money for its own sake (86% of victims indicated that there was no specific purpose for their investments other than wanting more money.)
  2. emphasizes the end result instead of the means of acquisition
  3. focuses on individual gain without consideration for the impact on others

This set of priorities has been proposed as a partial explanation for the United States’ high crime levels.  This article suggests the “American Dream” may also underlie the motivation of fraud victims.

  • By focusing on the possible gains and de-emphasizing the method of obtaining them, consumers ignore the risks in investment.
  • Particularly when traditional investments fail at downturns in the economy, the incessant monetary drive of “the American Dream” provokes riskier, desperate action.
  • This urgency promotes poor, hasty decision making, and increases the appeal of fraud.

The authors also identify a particular context that, in combination with a fraud ploy, makes an investor likely to become a victim: the deification of money in society and a common belief in the status it provides.  This is not a function of personal greed, but rather an aspect of the economic culture. Fraud victims may be more thoroughly “indoctrinated” than non-victims.

Author Abstract: American culture and the practices of government focus an overwhelming majority of attention on violent ‘‘street’’ crime. As a result, very little is known about the victims of fraud. In order to contribute to this literature, a case study is provided that examines the victim population of a Ponzi scheme. Data are provided on the general characteristics of the victims, their investments, and the growth of the scheme. A theoretical model is formulated from Messner and Rosenfeld’s work in Crime and the American Dream. This paper expands the concepts of this theory by providing evidence that it can be used to explain victim behavior.

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Consumer vulnerability to scams, swindles, and fraud: A new theory of visceral influences on persuasion

Authors: Jeff Langenderfer (Berry College) & Terence A. Shimp (University of South Carolina)

Publication: Psychology and Marketing

Year: 2001

Focus Area: Profile, Persuasion

Relevance: By outlining the theoretical process of a scam (and how a person either resists or succumbs), the author provides a template for evaluating reactions to the scam process and what contributes to vulnerability or resistance.

Summary: This article seeks to develop a theory of scamming vulnerability – what makes some people more vulnerable than others.

  • If we assume that there is some characteristic of scams that would allow a reasonable person to identify them as fraudulent, then there must be a process by which victims miss these cues.  Either, a) victims carefully examine a message but fail to recognize indicators of fraud, or b) victims fail to consider the offer carefully.  The former can be addressed through education, but the latter is related to the emotional appeal or “visceral influence” of the fraud.
  • The authors’ model of vulnerability suggests that, if a target is interested in a fraudulent offer, then the degree of vulnerability can be predicted by the target’s visceral response:
    • High visceral response (inspiring greed, hunger, lust, etc.) leads the target to ignore the rational elements of the message and focus instead on the emotionally desired outcome.
    • Low visceral response frees the target to examine the message rationally, and potentially identify cues that indicate its fraudulence.

This model is reinforced both by subjective evaluations of those witnessing fraud, such as employees of the Better Business Bureau, and by former scam artists who use emotional appeals to persuade targets.

This article also posits that victims who are not viscerally invested may be vulnerable because they are older and socially isolated.  This is countered by Van Wyk & Benson, 1997 and Van Wyk & Mason, 2001.

Author Abstract: Scams exact a huge toll on consumers and society at large, with annual costs in the United States alone exceeding $100 billion. The global proliferation of the Internet has enabled con artists to export their craft to a rapidly expanding market and reach previously untapped consumers. In spite of the prevalence of scams around the world, there has been virtually no academic attention devoted to understanding the factors that might account for why individuals differ in their scamming vulnerability. Building on the background of elder consumer disadvantage and informed by the authors’ own survey of expert opinion, this article presents a tentative theory of scamming vulnerability. The proposed theory incorporates the effects of visceral influences on consumer response to scam offers and hypothesizes a role for various moderating factors such as self-control, gullibility, susceptibility to interpersonal influence, and scam knowledge. Theoretical propositions are provided for future empirical investigation.

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