Each year, researchers estimate that more than 30 million Americans are victims of financial fraud, whether it's losing their retirement savings to a deceitful financial advisor, falling for an Internet scam or having their money surreptitiously siphoned by their own adult children.
Fraud may total up to $50 billion annually in the United States and is on the rise: Reported incidents rose more than 700 percent between 2001 and 2011, according to the Federal Trade Commission, and that doesn't account for the thousands of cases researchers expect go unreported — or even unrecognized by the victims themselves — each year.
To help support and disseminate research that addresses this problem, in 2011 psychologist Laura Carstensen, PhD, and financial expert Martha Deevy founded the Financial Fraud Research Center. The center is part of the Stanford Center on Longevity and is funded in part by the Financial Industry Regulatory Authority Investor Education Foundation.
The center is a home for research related to financial fraud and a hub for connecting those interested in combating the problem in the lab and on the ground. In November, Deevy and colleagues released the center's first white paper outlining what is known and what has yet to be learned about consumer financial fraud, including its prevalence, victims, perpetrators and methods.
The Monitor talked with Carstensen, who's also the founding director of the Stanford Center on Longevity and a National Institute on Aging-funded expert in lifespan development, and Deevy, a finance, technology and management expert who directs the Center on Longevity's Financial Security Division. They spoke about financial fraud — and how research can help reverse the troubling trend.
What are some examples of the research the center is conducting?
Carstensen: We completed one study that looked at the effectiveness of AARP's call centers. The centers get lists of former victims and call them and warn them about new possible scams, but the work hadn't really been evaluated. So we had the telemarketers present two warning messages representative of scams that were occurring at the time, including one in which the caller claimed to be an online pharmacy and another in which the caller told the victims they were eligible for a federal stimulus grant.
We then followed up with phony pitches that either matched what the victim had been warned about or was different.
It turns out that the group who heard the different warning message was less likely to fall for the scam four weeks later. So we think a more general warning message might be most effective in preventing scams since these change all the time and people are more likely to remember the gist of something — even if the details of the message get lost. We're also conducting research to try to pinpoint which individuals are more susceptible to financial fraud. It looks like openness to experience — this basic psychological trait — is one that puts you at risk for falling for this type of thing. It's the people who stay engaged with the scam the longest who are most likely to get pulled in. So one of the best approaches might be the "just hang up" approach: Don't listen to the call, or delete the email, and don't give it a second thought.
How have the profile of the victim and the way people are targeted changed in recent years?
Deevy: You actually find that the victim profile for an investment fraud victim is interestingly a middle-aged, educated, financially literate white male. And one other variable that comes up in that profile is that they are under some financial strain. And so, with that profile, you could imagine that more people over the last couple of years may have found themselves more susceptible because of that financial tension.
Carstensen: Advances in technology have made conducting fraud more cost effective. You can send out this Nigerian scheme or a lottery email request and it's very cheap to get it out there. And most people are not going to respond, but it doesn't take a lot to make some real profit.
Why is the multidisciplinary aspect of the center so important?
Carstensen: We are working with faculty from the law school, from computer science, from neuroscience, from psychology and from the business school. And each of those disciplines brings a unique perspective on research and how they approach research and also what their initial thoughts would be on solutions and interventions.
Bringing those types of folks together to focus on fraud is always very interesting, but I think what makes it even more so is when you bring in folks from finance and AARP and the U.S. Postal Service. Then, you're really starting to bring together people … from the front lines who are most likely to be able to do something about financial fraud. That's when we think we can be most efficient in developing and identifying solutions to the challenges we're facing as an aging society.
What are some of the biggest challenges to bridging that gap between research and practice?
Carstensen: I think the real challenge — from a psychological perspective, that is — is how do you warn people? There are so many different types of scams and they change all the time, so you have to be general in warnings to folks. Developing an online resource where people can go to check if something is a scam or not might be one way to do this.
The other real challenge is that the con men are pitching in ways very similar to normal, everyday marketing practices, so it's very hard to think of ways that you can warn people against something that is a crime.
How can people distinguish between legitimate offers and scams?
Carstensen: You do it by developing a way of processing information so that red flags go up when certain kinds of pitches are made. Even if that salesman is legitimate … it still probably makes sense to put the brakes on when you're feeling pressured, when people are telling you things that don't sound quite right or if they're telling you, "You've got to move right now." Again, that's a pitch I've seen in legitimate marketing concepts, too, but we want to teach people that it's probably good to walk away at that point and think about it.
Another tip is noticing when you find yourself aroused emotionally. It may be positive or it may be negative, but either way, that's a good time to walk. In fact, that's another research project that the center has just recently awarded a grant to investigate: Are people more susceptible to a scam when they're excited and positively aroused, or suspicious and fearful and negatively aroused?
What should psychologists know about this problem?
Carstensen: I've learned there's not an obvious group or person in individuals' lives that you can turn to for complete assurance that they're going to have your best interest at heart. What an awful lot of people say to older adults in particular is that if they're going to make a financial investment, they should talk to their adult children first. And it turns out that adult children are right up there near the top of the list of people who would be potential perpetrators of fraud.
I think what we need to do is think about what is the optimal, ideal sort of people who can help protect all of our interests. Maybe it's having a triad together — a professional person, a family member and somebody else who might have expertise in these issues. Together you might get some reassurance that you're making a good choice in cases where people might be especially vulnerable.
Deevy: I think the idea that there is either one profile of the victim or one solution to preventing fraud from being perpetrated needs to sort of go out the window. There are different kinds of victims for different kinds of fraud activity. It's an incredibly nuanced area, so the solutions are not one size fits all.
There's one more thing that we're interested in: Where are the best places to get out the information? Who are the best sources of providing these prevention services? Is it somebody like AARP or some other expert agency? That's something that we're interested in pursuing.
As you learn more about fraud, how do you draw the line between being gullible and being paranoid?
Carstensen: I feel like the more familiar I am with fraud, the more I feel like we're all victims in waiting. We will all very likely be victims at some point, and we'll probably never know that we're victims. We'll send something off to some charitable organization that sent you a pitch and you don't know — you never will know — that that was just a cover for a criminal operation. It will happen. And the question is: How do we avoid it happening in a way that seriously harms our lives?
Deevy: Our interest in fraud particularly with an aging population is that there's less time to recovery. You know it's bad when a 20-something is victimized, but they have a little bit of runway to catch up. The stories that are heartbreaking are the 70-year-old retirees who have lost their life savings.