Fraud Doesnt Always Happen to Someone Else

Most of us know about investing and do our homework. So we would certainly almost never fall victim to investment scams or other schemes aimed at separating us from our money.

Right?

You might want to keep reading all the same, just in case your friends or family members need help. After all, Americans lose billions of dollars to myriad scams each year. People are lured to investment seminars with free lunches and then pressured into making bad decisions. Dubious charities pull at our heartstrings. Coin and collectibles salesmen tout their goods as alternatives to stocks and bonds. Clever Ponzi scheme perpetrators like Bernard Madoff persuade investors to keep sending in money.

Fighting Back
Tips to keep the scammers away.

Ask questions—lots of them.
Check credentials.
Seek professional or informed second opinions.
When evaluating an offer, always start your pro and con list with the "cons."
Sources: www.SaveandInvest.org; WSJ research

On top of all that, the pay cuts, job losses and other challenges of a recession make us more susceptible to schemes like work-at-home and mystery-shopper opportunities that promise to provide quick income, sometimes using well-known brands like Google in their names.

Studies of scammers and fraud victims have found some eye-opening trends. Such victims aren't necessarily uneducated and gullible, or naive seniors. The typical investment-scam victim is an optimistic married man in his later 50s who has a higher-than-average knowledge of financial matters and deep confidence in his own judgment, according to research funded by the Financial Industry Regulatory Authority's Finra Investor Education Foundation.

Another trait: Investment-fraud victims tend to believe that scams happen only to someone else, but they also tend to feel insecure about their finances, something that may be familiar to many people these days.

Research in the past five years on the behavior of victims and scammers may smash some of your stereotypes—and give you some new weapons to combat fraud. Consider:

Many scam victims are pretty smart. Three studies in 2006 and 2007 of identified investment-fraud victims and randomly selected participants—carried out by the Finra foundation, WISE Senior Services of Los Angeles and AARP Washington State—found that victims of investment fraud tend to be better educated than nonvictims, have higher incomes and have been investing for a decade or more. But they are so confident in their judgment that they fail to seek out professional or other opinions.

Victims of lottery and sweepstakes fraud are more likely to be elderly and to suffer from cognitive impairment or dementia, according to a continuing AARP Washington State study in which social workers have gone into victims' homes and assessed them. Even so, professionals who work with those victims note that they are often bright and capable of taking care of their daily business—even as they send money to scammers.

People are very good at rationalizing their mistakes. Even after victims have lost thousands of dollars, many don't identify themselves as victims or consider the scammers crooks, experts say. Why? They may be embarrassed, or, says Doug Shadel, director of the AARP's Washington State office, or they may simply be very good at explaining away their behavior.

They realize two inconsistent things, Mr. Shadel says: "I'm a smart person" and "I did something stupid." So you either decide, " ‘I'm in fact stupid.' Or you say, ‘What I did was not stupid, and I'm going to keep doing it to prove that it will be true.' "

Scam victims often aren't motivated by pure greed. Con artists appeal to victims not with stories of fancy houses or fabulous trips, but with promises that the windfall will allow them to leave something for their children or help grandchildren with college tuition, say law-enforcement officials and consumer advocates who have reviewed transcripts of scam telemarketing calls. They try to target vulnerabilities or insecurities. Fraudulent charities, for instance, play on our generosity and our tendency to give unconditionally.

Emotion and intuition can overrule logic. About a decade ago, Nora J. Carpenter, then head of the Better Business Bureau's southwest Idaho office, ran an experiment to warn people about unscrupulous charities just before the holiday season.

With the help of the Salvation Army and a local television station, the BBB arranged for an off-duty bell-ringer in everyday clothes to stand outside a store with a bell and a plastic pumpkin-shaped Halloween bucket. No signs identified him. Yet for the 20 minutes or so that he rang his bell, people dropped cash into the pumpkin.

When donors were stopped and queried, they were certain they had given to the Salvation Army. "Con artists are not necessarily smarter than the rest of us. They're just better students of our habits," says Ms. Carpenter, now a senior vice president at the Council of Better Business Bureaus in Arlington, Va.

Scammers are very good at zeroing in on victims' weaknesses. Con artists work to control the conversation, talking fast, using exciting statements, promising big returns and acting like the victim's friend. One con artist in the Finra study told researchers that he spent the first 15 minutes of each call with one victim praying because he learned that she turned to God when faced with a decision.

James Vitale, who spent time in prison for peddling fraudulent business opportunities, says he learned to listen carefully to victims and then paint the picture they wanted to see. Eventually, they're lulled almost into a stupor, "hearing exactly what they want to hear," he says.

Earlier this year, Mr. Vitale, now 42, told a Federal Trade Commission fraud forum that he preferred speaking with a man because "you can lather him up and push all the green buttons." Women were more cautious and asked too many questions, he said, prompting an office maxim, "Don't pitch to the b—."

A persuasion detector may be your best defense. People who listened passively to pitches were more vulnerable than those who asked questions, according to research conducted in 2007 and 2008 by AARP and the AARP Foundation.

Researchers developed a 90-minute workshop and trained more than 100 older adults in how persuasion tactics are used and how to respond. The researchers then engaged a former seller of oil and gas investments to pitch the participants. Those who had the training asked more questions and were half as likely to respond to a polished pitch as those without the training.

We don't get dumber as we age. But Laura Carstensen, director of Stanford University's Center on Longevity, has shown in studies she conducted that unlike young people, older people remember happy or upbeat images or ideas more readily than unpleasant ones. That might make them more susceptible to upbeat sales pitches.

Other research shows that whether you're old or young, focusing first on the positives of a purchase or decision makes it harder to come up with the negatives—and vice versa. Generating one list "inhibits your ability to generate the other list," Dr. Carstensen says. When you're weighing an offer or decision, always start with your list of "cons" before considering the "pros." It may save you a bundle.