Frauds, lotteries and human nature

David MoonBlog

by David Moon


When Judge Leon Jordan sentenced Knoxville financial thug and thief Jacqueline Stanfill to nine years in prison it marked the latest chapter of a long book of Knoxville financial fraud. The collapse of the Butcher banking empire in 1983 wasn’t the first East Tennessee Ponzi scheme, but it certainly launched more than three decades of repeated and costly swindles.  The suckers of these scams have mostly included intelligent, accomplished individuals—not exactly a stereotypical vision of vulnerable victims.

While the demographics of professional investment fraud victims differ significantly from that of the low-income, repeated lottery loser, the root vulnerabilities of each person are almost identical. State lotteries have the luxury of luring their victims with slick television ads and willing accomplices in the media. Investment fraudsters have to rely on a different marketing platform, but they appeal to the same core weaknesses as does the lottery.

Victims of financial fraud are likely to be affluent or wealthy, white, older, extroverted and well-educated. Regular lottery losers are likely to be in their 20s or 30s, black, high school graduates or drop-outs, introverts and in the lowest income quintile. The operators of both Ponzi schemes and state lotteries, however, appeal to the same human weaknesses of their respective target markets.

Once victims develop a confirmation bias, they pay more attention to information that confirms their already preconceived conclusion, even in the face of overwhelming conflicting evidence. Once I have decided that Nigerian currency futures or the Super Pooper Powerball is my path to riches, I will focus on any piece of positive African news or situations in which I accidentally run across my lucky numbers. “It must be a sign.”

Like scientists, wise investors do the opposite, skeptically seeking reasons to disprove their initial conclusions.

Victims are likely to be influenced by visual imagery rather than raw data. Lottery commercials feature rare winners with fake, oversized checks and wealthy smiles. Investment fraudsters are likely to showcase the trappings of success and wealth, even if financed by their previous, still unknowing victims. If the sales material for an investment is mostly pictures of 50-year-old retirees wearing white pants on the beach, move on.

A person who spends time or energy focusing on massive jackpot or investment successes is likely to suffer from something called availability bias. That is, if they see others who have hit it big, there is a chance they might, too. In 2013, a Brazilian man was crushed to death by a cow falling through the roof of his home. Despite the similar odds of being killed by a falling farm animal and making a fortune from the lottery or a too-good-to-be-true investment scam, few of us focus on the cow.

Wise investors are vigilantly attentive, always looking for signs of both fraud and of their own natural vulnerabilities.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).