The Psychology of Consumer Fraud

THE PSYCHOLOGY OF CONSUMER FRAUD PROEFSCHRIFT ter verkrijging van de graad van doctor aan de Universiteit van Tilburg, op gezag van de rector magnificus, prof. dr. F.A. van der Duyn Schouten, in het openbaar te verdedigen ten overstaan van een door het college van promoties aangewezen commissie in de aula van de Universiteit op woensdag 19 december 2007. om 10.15 uur door Douglas Philip Shadel geboren op 9 december 1957 te Winchester, Virginia, U.S.A. om 11.15 uur door Karla Blair Schweitzer Pak geboren op 24 september 1976 te Clarkston, Michigan, U.S.A. Promotores: Prof. Dr. J.B. Rijsman Submitted by: Karla Pak and Doug Shadel Seattle, Washington, USA 206 517-2316 ©2007 Karla Pak and Doug Shadel 2 Table of Contents i. Introduction 5 Chapter 1 – Literature on Social Influence 1.1 Social Influence Tactics, Persuasion and Fraud Crimes 9 1.2 Cognitive-Based Social Influence Tactics 13 1.3 Social-Norms Based Social Influence Tactics 26 Chapter 2 - Literature on Consumer Fraud 2.1 Overview of Literature on Fraud Victimization 31 2.2 Prevalence Studies: How many people are being taken? 32 2.3 Fraud Typology Studies: What kinds of scams are out there? 37 2.4 Victim Profiles: Who is being taken? 43 Chapter 3 - Undercover Taping Project 3.1 Introduction to Research Studies 59 3.2 Methods of Taping Project 60 3.3 Results of Taping Project 66 3.4 Discussion of Results 82 Chapter 4 - Fraud Survey 1: Profiling Victims 4.1 Methods of Survey 95 4.2 Survey Results 104 4.3 Discussion of Survey Results 125 Chapter 5 – Fraud Survey 2: Profile Replication Study 141 Chapter 6 - Conclusions and Future Research Directions 157 Appendix 1 - Comparisons of Number of Tactics used by Scam Type 165 Appendix 2 - Analyses of Distribution of Tactics used by Scam Type 166 Appendix 3 - Comparisons of Unique tactics used by Scam Type 167 Appendix 4 - Comparisons of Individual Tactics used by Scam Type 168 Appendix 5 - Survey 1: Annotated Survey 171 Appendix 6 - Survey 2: Annotated Survey 204 References 231 3 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. In deze driedelige studie werd consumentenbedrog onderzocht. In het eerste deel werden geheime opnames van zwendelpogingen geanalyseerd om na te gaan hoe zwendelaars hun slachtoffers proberen op te lichten. Uit de analyses bleek dat de criminele zwendelaars hun oplichtingspoging aanpassen aan het psychologisch profiel van hun slachtoffer en daarbij gebruik maken van een ingewikkelde combinatie van beinvloedingstaktieken om hun doel te bereiken. In het tweede deel werd een enquête, bestaande uit 72 vragen, gehouden onder 80 slachtoffers van loterijbedrog, 80 slachtoffers van investeringsbedrog, en 160 niet-slachtoffers. Het bleek dat slachtoffers van investeringsbedrog meer verstand hadden van basale financiele geletterheid dan niet- slachtoffers. Beide typen slachtoffers, zowel die van investeringsbedrog als die van loterijbedrog, hadden relatief meer kans op het hebben meegemaakt van een negatieve levenservaring, anders dan het slachtofferschap van het bedrog zelf, dan niet-slachtoffers. Ook vertoonden beide typen slachtoffers een hogere neiging tot het luisteren naar verkooppraatjes van onbekende mensen. Verder bleek dat de onderrapportering van bedrog bij beide typen slachtoffers dramatisch was. In deel drie werd een tweede enquête gehouden in een nieuwe populatie van 125 slachtoffers van investeringsbedrog en 258 niet-slachtoffers, om na te gaan of de bevindingen uit de eerste enquête zouden herhaald worden. En inderdaad, de voornaamste bevindingen met betrekking tot de financiele geletterdheid, alsook met betrekking tot de demografische, psychologische en gedragskarakteristieken van slachtoffers van investeringsbedrog werden herhaald. Er werden echter ook nieuwe vaststellingen gedaan met betrekking tot de geletterdheid op het vlak van ‘overtuiging’. Het bleek namelijk dat slachtoffers van investeringsbedrog minder goed in staat waren om oplichtingsgetinte uitspraken van zwendelaars in hun betoog te onderscheiden dan mensen uit de gewone populatie. Dit doet ons veronderstellen dat een goede sleutelstrategie voor het terugdringen van slachtoffers in dit gebied van bedrog zou kunnen bestaan uit het geven van onderwijs aan investeerders, waarbij niet alleen aandacht wordt geschonken aan hun geletterheid op financieel vlak, maar ook aan hun geletterdheid op het vlak van de manier waarop mensen elkaar overtuigen. 4 i. Introduction Consumer fraud is a large and growing problem in the United States and around the world. Studies in the U.S. indicate that con artists net approximately 40 billion dollars each year on scams (Titus, Heinzelmann, & Boyle, 1995). A recent Federal Trade Commission study suggested that at least 11.2% of the U.S. population has been victimized by con artists. This adds up to over 24 million victims in the U.S. alone each year (Anderson, 2004). The United Nations administers the “International Crime Victims Survey” once every 4 years in 20 industrialized European countries. That survey asks respondents about their experience with fraud and an average of 7.7% of all respondents across all countries indicated they were victimized by fraud in the previous year (United Nations, 2000). In addition, further studies suggest that these numbers may under-estimate the extent of the problem. One study found that less than 50% of a population of known victims were willing to admit that they had been scammed when surveyed (AARP, 2003a). We are particularly interested in this crime because we work for AARP, which is an advocacy organization for older people. As we will discuss, there is some debate in the literature about whether older consumers are more or less targeted by fraud crimes. Regardless of the rate of victimization among older consumers, we do know that older victims of fraud often suffer severe negative effects as a result of being fraud victims. Some become repeat victims and lose their life savings while others have been shown to have a lower life expectancy than the general population (Pratkanis & Shadel, 2005). As we began to think about what aspects of the fraud crime to focus on, it occurred to us to look at fraud through the lens of one of the oldest and most basic models of communication. In communication theory, there is a sender of the message, a message, and a receiver of the message (see Figure 1). In terms of the crime of fraud, the sender is known as the “con artist”, an individual whose intent is to use messages to deceive people into giving them money. The message is referred to as the “pitch” which is used to deceive people and the receiver is referred to as the “victim” who falls for the deceptive message and turns over money. The focus of this study will be on two of these three elements: the pitch and the victim. We intend to learn as much as we can about how con artists persuade their victims and how victims differ from the general population demographically, psychologically and behaviorally. 5 The Structure of the Fraud Crime Sender Message Receiver (Con artist) (Pitch) (Victim) Figure 1: The Structure of the Fraud Crime Part One – Understanding the Psychology of the Fraud Pitch We begin our exploration of understanding how con artists persuade or “pitch” their victim by reviewing the literature on social influence tactics. Social influence tactics are methods that individuals use to persuade others. Section 1.1 will provide an overview of this area of the literature. Then in Sections 1.2 and 1.3, we review the relevant social influence literature which is divided into two broad areas: tactics based on cognitive heuristics and tactics based on social norms. Once we have reviewed the literature on social influence, we will provide a detailed description in Sections 3.1 through 3.4 of our analysis of 128 undercover tapes of fraud pitches provided by 12 different law enforcement agencies made between 1995 and 2003. The tapes of pitches were made when elderly fraud victims were identified and their phone numbers were transferred to ring into the office of a criminal investigator. The investigator would answer the phone pretending to be the elderly victim and tape- record everything the con artist said. These tapes provide us with an unprecedented verbatim record of what con artists say over the phone to persuade. 6 Part Two: Profiling Fraud Victims With regard to our study of victims, in Chapter 2, we provide an overview of relevant literature on fraud victimization.

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