Predictably Irrational

Authors: Dan Ariely (Duke University)

Publication: (Book) HarperCollins Publishers

Year: 2009

Focus Area: Decision Making, Consumer Behavior

Relevance: Effective financial fraud prevention depends on an accurate understanding of the repetitive, predictable, and often irrational financial mistakes in consumer decision making.

Summary: This book outlines systematic, irrational tendencies of consumers and highlights ways in which we might account for, and protect against, these unconscious vulnerabilities.  Weaknesses include:

  1. Relative value— Comparative mechanisms such as anchoring price can dramatically change “market value”.
  2. Scarcity— We value something more because of its perceived rarity.
  3. Zero’s cost— There is a marked cost to getting something “free”, and why its psychological effects are so strong.
  4. Social vs. Market relationships— These two are starkly divided, mentally, and can be used for better business and civic relationships.
  5. Emotions— We not only make entirely different decisions when influenced by emotions, but are incapable of predicting these changes when not under their influence.
  6. Procrastination—The immediate value of gratification supersedes the delayed potential value of acts such as financial saving, regardless of pre-determined plans.
  7. Ownership—We overvalue what we have.
  8. Irresistible options—The desire to maintain “options” overwhelms basic priorities.
  9. Confirmation bias—We tend to perceive whatever we expect to perceive.
  10. Price as Placebo—Not only do we correlate increased cost with increased value, but the increase in perceived value can have an impact on actual value (e.g., 50-cent aspirin can provide greater pain relief than 5-cent aspirin).

On the positive side, these inefficiencies suggest that significant advances can be made by accounting for these mental weaknesses.  For example, making the option to “opt out of” instead of “opt into” organ donor programs drastically increases participation.  Similarly, one might take advantage of a person’s procrastination tendency by asking for a savings commitment tied to a future promotion.  (Both of these options have been implemented to great success.)  Behavioral economics, then, may provide to the fraud prevention world with, ironically, a free lunch: improved consumer behavior at limited or no extra cost.

First Paragraph: I have been told by many people that I have an unusual way of looking at the world.  Over the last 20 years or so of my research career, it’s enabled me to have a lot of fun figuring out what really influences our decisions in daily life (as opposed to what we think, often with great confidence, influences them).

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The Tyranny of Choice

Author: Barry Schwartz

Publication: Scientific American

Year: 2004

Focus Area: Consumer Behavior, Decision Making

Relevance: When developing protective strategies for those vulnerable to financial fraud, limiting options may increase participation in, and satisfaction with, a given program (such as protected accounts or savings plans).

Summary: We presume that more choices allows us to get exactly what we want, making us happier.  While there is no doubt that some choice is better than none, more may quickly become too much.  Drawbacks include:

  • Regret:  More options means constantly considering the option we didn’t choose –decreasing satisfaction overall.
    • Instead, learn to accept “good enough” and stop thinking about it.
  • Adaptation: By becoming accustomed to whatever we’ve chosen, the availability to more options decreases our satisfaction with our choice.
    • Instead, limit thinking about options foregone, and focus on the positive of the option chosen.
  • Unattainable expectations: With increased options, our expectation escalates until we constantly expect to get precisely what we want.  Thus anything less than perfect is disappointing, and we blame ourselves (as the decision makers) for our unhappiness.
    • Instead, control expectations to a certain standard of requirements, and keep them reasonable.
  • Paralysis: Too many options can decrease the likelihood of making any decision at all.
    • Instead, limit options when decisions aren’t crucial.

Largely an issue for modern, affluent Western societies, the paradox of too much choice strains consumers’ capacity for decision making.  Making financial security decisions simple, easy, and justifiable may facilitate increased and happier participation.

Author Abstract: Americans today choose among more options in more parts of life than has ever been possible before. To an extent, the opportunity to choose enhances our lives. It is only logical to think that if some choice is good, more is better; people who care about having infinite options will benefit from them, and those who do not can always just ignore the 273 versions of cereal they have never tried. Yet recent research strongly suggests that, psychologically, this assumption is wrong. Although some choice is undoubtedly better than none, more is not always better than less.

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Resistance and Persuasion

Editors: Eric S. Knowles (University of Arkansas) & Jay A. Linn (Widener University)

Publication: Lawrence Erlbaum Associates, Publishers

Year: 2004

Focus Area: Persuasion, Prevention

Relevance: Understanding the properties of resistance puts one in a much stronger position to change another’s level of resistance – either to diminish or bolster it.

Summary: “This book explores persuasion by considering its antithesis: resistance” (p. 3).  This edited collection defines, dissects, understands, and explains the role of resistance as one half of a persuasive interaction.  Resistance can be expressed variously as: reactance, distrust, scrutiny, and inertia.

The book distinguishes “Alpha” from “Omega” strategies of persuasion – increasing the appeal of a change vs. reducing resistance towards a change – and identifies 7 strategies for managing resistance:

  1. pushing a decision into the future
  2. using narratives/stories to sidestep resistance
  3. warning a target of upcoming persuasion
  4. emphasizing positive thoughts about the message
  5. reinforcing the target’s self-esteem or self-image
  6. training people to identify illegitimate messages
  7. using resistance against itself

Identifying the processes that lead to a certain person’s perspective can indicate which methods would be most effective to overcome or reinforce that viewpoint.  The final chapter also provides a useful integration of information and points towards further areas of research.

Author Abstract: Do we need to convince you that persuasion is an important topic for the social sciences? Probably not. You know that humans are social beings. Our communication, psychology, social organization, political structures, market choices—in short, everything we do—is interpersonally coordinated. Persuasion is one of the important tools to achieve these alliances.

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Prospection: Experiencing the Future

Authors: Daniel T. Gilbert (Harvard University) & Timothy Wilson (University of Virginia)

Publication: Science

Year: 2007

Focus Area:

Relevance: If falling for a scam is partly the result of a victim incorrectly forecasting what will make them happy, then learning how to more accurately predict future feelings may help protect them.

Summary: Our notion of how we will feel in the future is based on simulation, or “prefeeling” – a combination of simulating an event, reacting to it internally, and then predicting that whatever we feel now is what we will feel when the event occurs.  Predictions can be flawed if the simulation is:

  1. Unrepresentative – by remembering the unusual instances the best, when we are called upon to envision something about the future, we think of the most memorable (and unlikely) situations in the past.  Our predictions become less accurate.
  2. Essentialized – by imagining the best or worst features of a future event, we fail to account for the many small things that will lessen the strength of whatever feelings we experience.  Bad events are not as bad and good events are not as good as we generally predict.
  3. Abbreviated – by simulating only key elements of a future occurrence, we tend to focus on the immediate repercussions of an event, and fail to anticipate how we will adapt to a given circumstance with time.

People also mispredict their future feelings when a simulation is decontextualized.  When the context in which the scenario is envisioned (and experienced cognitively) is different than when the scenario occurs (and is experienced actually), the feelings experienced are different.  Given that the context will likely change over a given span of time, predictions are frequently inaccurate.

Author Abstract: All animals can predict the hedonic consequences of events they’ve experienced before. But humans can predict the hedonic consequences of events they’ve never experienced by simulating those events in their minds. Scientists are beginning to understand how the brain simulates future events, how it uses those simulations to predict an event’s hedonic consequences, and why these predictions so often go awry.

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Creating Critical Consumers: Motivating Receptivity by Teaching Resistance

Authors: Brad J. Sagarin (Norther Illinois University), Robert B. Cialdini (Arizona State University)

Publication: Resistance and Persuasion. Ed. Eric S. Knowles & Jay A. Linn. Lawrence Erlbaum Associates, Publishers

Year: 2004

Focus Area: Prevention, Persuasion, Resistance, Consumer Behavior, Decision Making

Relevance: Effective fraud prevention depends in part upon reducing the public’s susceptibility to the tactics of fraudsters, while facilitating their preference for legitimate information sources.

Summary: This chapter outlines a series of experiments seeking to improve consumers’ decision making by teaching them to reject illegitimate and prefer legitimate persuasion methods.  In order to accomplish this, they discovered that individuals must:

  1. Appreciate their own vulnerability: Many people do not believe that they personally are vulnerable, and so do not internalize warnings or feel motivated to learn.  This awareness can be achieved by exposing them to controlled examples of their own susceptibility.
  2. Know how to identify legitimate vs. illegitimate messages: A basic distinction can be identified, such as the validity of an authority endorsing a product (e.g., the Surgeon General vs. an actor who plays a doctor on television when discussing a medical product).  This provides a substitute “rule-of-thumb” to use in decision making instead of simply “someone who looks like an authority.”

Not only are subjects exposed to this progression of training more likely to resist persuasive messages from illegitimate sources, but they show a clear preference for messages endorsed by legitimate authorities.

Teaching individuals to accept legitimate persuasion may in fact be easier than teaching them to resist illegitimate messages.  Given limited mental processing capacity, easy rules that guide acceptance are more likely to be used than the draining task of careful resistance.

Author Abstract: Consumers have a paradoxical relationship with advertising. To our great personal detriment, we routinely resist health-related warnings from legitimate authorities such as the Surgeon General. At the same time, we readily accept advice from illegitimate authorities, even those who begin their appeal by admitting that “I’m not a doctor, but I play one on TV.” This chapter describes three studies designed to tackle the latter problem—maladaptive gullibility. However, it turns out that that the former problem—misplaced skepticism— proved far easier to solve.

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Looking Ahead as a Technique to Reduce Resistance

Authors: Steven J. Sherman (Indiana University—Bloomington), Matthew T. Crawford (University of Bristol, England), & Allen R. McConnell (Miami University, Oxford, Ohio)

Publication: Resistance and Persuasion. Ed. Eric S. Knowles & Jay A. Linn. Lawrence Erlbaum Associates, Publishers

Year: 2004

Focus Area: Persuasion, Prevention, Resistance

Relevance: Successful fraud prevention depends on understanding both how victims are persuaded, and how to persuade victims to resist future ploys.  Manipulating a person’s perception of the future may be used to either increase or decrease a potential victim’s vulnerability.

Summary: Fear of regret is a primary source of motivation when a person thinks about the future.  One can use a person’s tendency to think about the future and fear regret as a persuasion method in a number of ways, including:

  • What if I’m wrong?: People are more likely to follow the advice of someone else when they think about the consequences of making a wrong decision.  This fear of regret reduces trust in their own judgment.
  • Scarcity: Scarcity increases the fear of missing out on something valuable, increasing motivation and persuasion.
  • Hypothetically-speaking:  Rather than requesting something directly (“Will you do x?”), it is more effective to first ask if the target would be willing to comply if the request was made (“Would you do x?”).  People are more likely to agree to a hypothetical, and will later tend to act in accordance with their earlier statement.
    • E.g. Simply asking subjects to volunteer for a charity received 2% compliance.  Asking if they would comply if asked yielded 40% compliance.  When the subjects were phoned weeks later and asked if they would volunteer, 38% complied – a 36% increase.
  • Easy futures: Given that people tend to underestimate the difficulty of carrying out a request when the event is far in the future, people are more likely to agree to requests of all types if they do not require immediate action.

In order to encourage compliance for a long-term request, it is better to focus on abstract motivators, such as desirability (positive) or moral repercussions (negative).  When seeking short-term compliance, concrete or “low-level” factors are more convincing, such as ease (positive) or high cost (negative).

Author Abstract: Social influence always involves resistance on the part of the target of influence. Regardless of the pressures toward acceptance of the influence, there is always a countervailing force in the form of resistance that reduces the likelihood of persuasion being effective. Successful influence, then, will be achieved only when the forces toward acceptance are greater than the forces stemming from resistance. As Knowles and Linn (this volume) so aptly point out, bringing about a situation where the forces toward acceptance are greater than the forces toward resistance can be achieved either by increasing the positive forces for persuasion or by decreasing the resistance that prevents persuasion.

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Rethinking Trust

Authors: Roderick Kramer (Stanford University)

Publication: Harvard Business Review

Year: 2009

Focus Area: Decision Making, Emotion, Prevention Techniques, Consumer Behavior

Relevance: Fraudsters prey on humans’ natural inclination to trust in others.  Establishing guidelines for safe establishment of trust — rather than operating by easily-faked rules such as friendliness, class, or social standing — may help guard against predatory ploys.

Summary: While trust is necessary and useful, our process of giving and receiving trust is often superficial and flawed.  This article outlines recent research on the subject and summarizes findings into practical guidelines.  These principles (below) include insights for both individuals and organizations.

  1. Know yourself: Establishing oneself as either generally trusting or distrusting can help one guard against the weaknesses of each tendency.
  2. Start small: Incremental steps in establishing trust are more reliable and long-lasting than simply placing trust wholly with a new individual or company.
  3. Write an escape clause: Hedging the risk of trust with a back-up plan both guards against mistakes in judgment and allows people to trust more fully.
  4. Send strong signals: Strong, quick and proportional retaliation to violations of trust is as vital for the protection against predatory individuals as open sharing is to the establishment of trusting relationships.
  5. Recognize the other person’s dilemma: To foster trust, understanding other people’s need for reinforcement is important for establishing a mutually solid, trusting relationship.
  6. Look at roles as well as people: It is easier for someone to trust a person in a position that inherently evokes trust — such as an engineer or investment advisor.  This tendency can be misleading, causing one to see the role and forget the people.
  7. Remain vigilant and always question: By continuing to evaluate the relationships in which we place trust, we are more likely to perceive changes (such as a shift in an investment advisor’s reporting) that indicate a breach of trust.

Author Abstract: For the past two decades, trust has been touted as the all-powerful lubricant that keeps the economic wheels turning and greases the right connections—all to our collective benefit. Popular business books proclaim the power and virtue of trust. Academics have enthusiastically piled up study after study showing the varied benefits of trust, especially when it is based on a clear track record, credible expertise, and prominence in the right networks.

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Low Self-Control, Routine Activities, and Fraud Victimization

Authors: Kristy Holtfreter, Michael D. Reisig (Florida State University) & Travis C. Pratt (Washington State University)

Publication: Criminology

Year: 2008

Focus Area: Profile

Relevance: Which factors put people at risk for fraud remain largely unknown.  Previous attempts to identify the demographic profiles of common victims have had limited success.  This article instead examines behavioral characteristics that increase people’s risk of financial fraud.

Summary: One of the first theoretical analyses of fraud targeting and victimization, this article explores what puts people at risk for fraud targeting and victimization by examining specific routine financial activities and financial self-control.

  • Remote-purchasing (e.g., mail-order, online) significantly increases consumers’ risk of being targeted.  One additional form of remote-purchasing behavior (phone sales, infomercials, etc.) translates into a 61% increase in the odds of being targeted.
  • Low levels of self-control increase the likelihood of victimization once targeted.  An increase of one additional marker of low self-control on the evaluation scale increased the odds of succumbing to a fraudulent ploy by 302%.

This study uses data from a random Florida telephone survey conducted in 2004-2005, interviewing over 1,000 adults (922 complete responses).

For further research on enhancing individuals’ financial self-control, see: Hay and Forrest, 2006; Mitchell and MacKenzie, 2006; Muraven, Pogarsky, and Shmueli, 2006

Author Abstract: Recent research has used both routine activity/lifestyle frameworks and self-control theory to explain victimization. Thus far, combined tests of these theories have focused on offending populations and street crime victimization. Whether these frameworks also explain exposure to and likelihood of nonviolent victimization (e.g., fraud) in general population samples remains an open empirical question. Building on prior work, we assess the independent effects of routine consumer activities (i.e., remote purchasing) and low self-control on the likelihood of fraud targeting and victimization. Using a representative sample of 922 adults from a statewide survey in Florida, the results confirm our expectation that remote-purchasing activities increase consumers’ risk of being targeted for fraud. Low self-control has no effect on whether consumers are targeted, but it does significantly increase the likelihood of fraud victimization.

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2003 Consumer Experience Survey: Insights on consumer credit behavior, fraud, and financial planning

Author & Publishing: AARP

Year: 2003

Focus Area: Prevalence, Profile

Relevance: The rate and financial impact of fraud in the U.S. remains unclear, and survey studies such as this provide a useful window into the experiences of consumers.  By focusing on those 45+, this survey targets those with greater wealth and, potentially, more to lose.

Summary: This report examines the consumer behavior of adults age 45 and over.  It includes a measure of “bad experience with products or services,” which is identified as fraud or non-fraud.  Key findings include:

  • About 4 in 10 consumers reported ever having a bad buying experience when buying a product or service.
  • The percentage of consumers reporting a “bad experience” has increased significantly in recent years.  For instance, those reporting not receiving a product or service in the promised time increased 12% from 1999 to 2003.

Of those reporting a “bad experience,” 37% defined the experience as a major swindle or fraud.

  • Approximately 3.75% of the 45+ sample surveyed reported having been the victim of a fraud.
  • Approximately 2% of respondents reported that a given fraud cost them more than $1000.
  • The most frequent types of fraud reported by victims were: faulty car sale, false advertisement, company of purchase went out of business, and house contractor fraud.
  • African-Americans and 30% more likely than the general population and 45% more likely than Hispanics to indicate that a swindle or fraud cost them more than $1000.

Author Abstract: The 2003 Consumer Experiences Survey is the fourth survey in a series of periodic studies conducted in the past 10 years. The three previous surveys of consumer behavior were conducted in 1993, 1999, and 2000. 1 The current study examined many of the same topics from the past three studies including buying experiences with products and services, knowledge about investment terms, and experience with major fraud or swindles. However, other pertinent issues have been added to the current study including privacy and identity theft, and predatory mortgage lending.

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Narrative Persuasion and Overcoming Resistance

Authors: Sonya Dal Cin, Mark P. Zanna, & Geoffrey T. Fong (University of Waterloo)

Publication: Resistance and Persuasion. Ed. Eric S. Knowles & Jay A. Linn. Lawrence Erlbaum Associates, Publishers

Year: 2004

Focus Area: Persuasion, Resistance, Prevention

Relevance: Fraud prevention efforts struggle to convince potential victims of their own vulnerability, of the prevalence of fraud, and of the magnetic appeal of many fraudsters.  These messages might be more effectively received if they were presented in a narrative, or story format.

Summary: Narratives are particularly effective for overcoming strong resistance for a number of reasons, including:

  1. People don’t expect to be influenced by a tale, and so don’t summon the same degree of resistance.
  2. Given that narratives inspire careful attention, targeted messages are attended to that might otherwise be ignored.  People generally avoid information that is incongruous with their existing attitudes (e.g., Sweeney & Gruber, 1984), but narratives convey a message “under the radar.”
  3. Arguing against the “real” experience of someone in a story is more difficult than arguing against a hypothetical situation.  While fictional stories may not be true, if they appear plausible then they may still carry the same persuasive impact.
  4. Beliefs can be presented implicitly in a story, as opposed to being stated explicitly in an argument.  With no specific arguments to resist, the beliefs are more difficult to oppose.
  5. When people are cognitively and emotionally invested in a story, they are left with less ability (mental resources) or motivation to resist the targeted message.
  6. As people are more inclined to accept information from someone they like and feel kinship with, stories can present messages from likable characters with whom people can relate. (For example, the Office of National Drug Control Policy (ONDCP) negotiated with television networks to include anti-drug story lines in popular series (Forbes, 2000).  The opportunities for message placement are substantial.

Author Abstract: Narratives are ubiquitous. Consider the vast numbers of people who are consuming stories at any given time. Casual observation of rush-hour passengers on the subway in Toronto (and we imagine those in Chicago, New York, and Paris) reveals a large number of commuters reading newspapers, magazines, and novels. At the same time, commuters driving the city’s major highways are listening to the radio—hearing stories about what is happening in the world. Children in day care and at school spend part of the day reading (or being read) stories, selected as age-appropriate and noncontroversial in their content, lest impressionable youth be led astray. Meanwhile, adults at home avidly tune in to soap operas. After school and after work, millions of people around the world switch on the television, expecting to be entertained by dramas, comedies, and “reality” television.

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