By: Amanda W, Jason S, Adam Y, Thomas T, and Jeanette W

About the AuthorBy Psychologist Stephen GreenspanWrote “Annals of Gullibility” which explains why

people behave in a manner that expose them to severe and predictable risks

After writing this book, he lost some of his retirement savings in the Madoff Scam

Invested in one of 15 “feeder” hedge fundsWanted to maintain enough wealth to build and

maintain a happy and secure retirement

The History of Ponzi SchemesPonzi Scheme: a fraud in which invested money

is pocketed by the schemer and investors who wish to redeem their money are actually paid out of the proceeds from new investors.

Charles PonziItalian ImmigrantPocketed millions of dollars

Promised huge return on investments

Lloyd’s of London Scheme

Famed insurance marketRapidly brought new investors into its formerly

exclusive marketPromised good returnsLured people in by the chance to become a

“name” (prestigious status)Led to ruin in many cases

Inheritance Scams

A purported heir to a huge fortune asks for a short-term investment in order to clear up legal difficulties involving inheritance

Investor is promised a huge returns for the short-term loan

Modern internet versionThe “419 scam”

Thèrése Humbert’s ScamOccurred in France in the 1880s and 1890sClaimed to be the heiress to the fortune of rich

American, Robert Henry CrawfordMilked the story for 20 years and was able to live

in high style“The greatest scandal of the century”Kept going by her prestigious father-in-law who

publically reassured investors

The Drake SchemePerpetrated by a former Illinois farm boy, Oscar HartzellSwindled over 100,000 farmers and shopkeepersClaimed that Sir Francis Drake died without any children

and the will stated that Colonel Drexel Drake was heir to the estateColonel Drexel didn’t want to estate since he was

about to marry his wealthy niece so he turned his interest over to Mr. Hartzell

Became a social movement known as “the Drakers”Hartzell was eventually indicted for fraud

The Madoff Scam: “Rye Prime Bond Fund”

Run by highly regarded money manager and former chairman of Nasdaq, Bernard Madoff

“Rye Prime Bond Fund” was part of the respected Tremont family of funds

Defrauded wealthy investors and charities of at least $50 billion.

Offered modest rather than spectacular gainsSmall but steady returns, high enough to be

attractive but not so high as to arouse suspicion

Reasons Humans are GullibleSituations

Gullible behavior is most likely to occur when the social and situational pressures are strong

The Madoff scam had very strong social feedback pressures

Most of the investors in Mr. Madoff’s scheme were Jewish and Mr. Madoff was known as a prominent Jewish philanthropist

Reasons Humans are GullibleCognition

Deficiencies in knowledge or clear thinking are often implicated in a gullible act

There is a distinction between intelligence and rationality

Irrational decisions are driven by the use of intuitive, impulsive and non reflective cognitive styles, often driven by emotion

Reasons Humans are GulliblePersonality

Not all highly trusting people are gullibleThe need to be the nice guy who always says

“yes”Trust and niceness accompanied by tendency

toward risk-taking and impulsive decision-making

Reasons Humans are GullibleEmotion

Emotion that motivates gullible behavior is excitement at the prospect of increasing and protecting one’s wealth

GreedDue to modest returns in the Madoff Scam,

investors were most likely not driven by greed

Questions???Questions???