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 the red 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.