According to an
article recently published by The Washington Post, our natural human tendencies
make us susceptible to fraud, especially if the person trying to con us
is able to make a good first impression:
"The hook is baited as soon as we meet a well-dressed, articulate
pitchman. Our first reaction is that this guy must be legit. What we don't
realize is that this impression imbeds itself deep in our gray matter,"
wrote author Bob Frick.
Frick is referring to what psychologists call "confirmation bias,"
which is a shortcoming in human cognition. Research has shown that humans
assess evidence and make decisions based on "biased" reasoning.
When we have a hypothesis - that a particular investment adviser is competent
or an opportunity is legitimate, for example - we have a tendency to seek
out information that reinforces our hypothesis. We also reject or ignore
information that could refute our hypothesis.
In short, it seems we'd rather be duped than be wrong.
Pat Huddleston, head of Investor's Watchdog and a former Securities
and Exchange Commission enforcement officer, seems to agree: "We're
subconsciously and stubbornly tied to that first theory...We think that
everything really is what it appears to be, and when we get a fact that
doesn't quite fit in the puzzle, we force it in." (As quoted
in the article.)
According to Frick, "human tendencies" even explain why many
experienced investors fall victim to investment fraud. To support his
theory, he discussed a British study, which indicated that the more experience
people have in an area, the more they overestimate their degree of control
over what happens to them. And, this overconfidence can, in turn, lead
them to be less wary of negative outcomes.
While it's difficult to overcome our biases, we can recognize that
they exist and strive to work around them. To protect yourself from yourself: know thered flags of investment fraud, and be diligent in your watch for them. Most importantly, if one pops
up, don't ignore it. Remember: If something seems too good to be true,
it probably is.