As many of you know, I am a keen student of behavioral finance or the “psychology of money”. Psychologists and economists in this area of study seek to identify behaviors that are counterproductive to sound investment decisions. Many times these behaviors are so virtually universal in humans and so “hard wired" into our personalities that we are unaware of them and they can be very difficult to overcome. Psychologists call these behaviors “archetypes”. Usually they are rooted in some survival skill that has enabled our species to survive and thrive during the vast majority of our existence when we were hunter gatherers.
The pioneering psychologist Carl Jung named one of these archetypes “the stranger” or “the enemy” (occasionally he called it “the predator” or “evil stranger”). This behavioral complex is very strong in humans and appears at a very early age. It is reinforced by nearly everyone in childhood that cares for us (parents, teachers etc.). Consequently, we are naturally very suspicious and distrustful of people we don’t know. Conversely, we also tend to trust those we know or who have similar racial, ethnic or religious backgrounds as ourselves. This makes sense in that it would have been advantageous for early humans to trust those in their own tribe but not strangers, as those were almost universally hostile.
However, this tendency to trust the familiar is the basis for our vulnerability to “affinity fraud”. This is a financial crime perpetrated on people belonging to a definitive racial, ethnic or religious group. The fraud is almost always committed by a trusted member of the group. Affinity fraud is a huge problem in the U.S. Estimates put the losses from identified affinity fraud cases over the last ten years at approximately $50 Billion. Some high profile examples are Bernard Madoff, whose mostly Jewish victims lost an approximate $20 Billion in a massive Ponzi scheme that spanned some 20 years, and a South Carolina insurance salesman who conned fellow church members, all of whom were senior citizens, into mortgaging their homes and buying expensive life insurance policies with the proceeds. Because of the way our brains are hard wired we are vulnerable to this very heinous kind of financial crime. What can you do to protect yourself?
Please subject all investment offers or services to the same careful scrutiny whether they are proposed by those unknown to you or by friends, relatives or fellow members of an affinity group to which you belong. Senior citizens are especially attractive targets for this kind of fraud so if you are watching out for parents or other older family members make sure they thoroughly check out investment opportunities, products or services. The U.S. Securities and Exchange Commission has dedicated a section of its public website to consumer protection from affinity fraud. Check it out at http://www.sec.gov/investor/pubs/affinity.htm . Also the various state securities regulators are active in affinity fraud prevention. In Pennsylvania you can access the Pennsylvania Department of Securities and Banking consumer website at
http://www.psc.state.pa.us/portal/server.pt/community/consumers_investors/14322 . If you think an investment pitch seems fishy, give these folks a call. They are there to protect you.