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By Adam Zoll | 02-11-2013 04:00 PM

How to Spot Con Men Before They Spot You

Doug Shadel of the AARP provides a detailed outline of common scams and tactics con men use, reasons investors fall for them, and tips so that you don't become a victim of financial fraud yourself.

Adam Zoll: For Morningstar, I'm Adam Zoll. Financial fraud costs older Americans billions of dollars a year, and even those with financial smarts can become victims. Here to talk with me today via Skype is Doug Shadel. Doug is director of AARP Washington and author of the book, Outsmarting the Scam Artists. Doug, thanks for being here today.

Doug Shadel: My pleasure.

Zoll: Doug, when most people think of people who might become victimized by a financial scam artist, they probably think of someone who maybe is not terribly financially literate, someone who maybe is even gullible about financial matters, but your research has found that, that's not necessarily the case.

Shadel: That's right. We did a study with the FINRA Foundation several years ago, and what we did was we surveyed known victims of investment fraud and compared their responses with just the general public. We had operated on the assumption that victims of fraud would be less financially literate if they would have less money. We found just the opposite to be the case, that actually victims of investment fraud are more financially literate than the general public. They tend to have higher levels of income, more assets, all the things that seem counterintuitive to the victim population.

In subsequent studies, we have found that while the victims may be more financially literate, they're less persuasion literate. We can get into that if you want to, but we've done a lot of research on this whole business of how con men persuade. And I think that's part of the secret to why people who you'd think would not fall for it do fall for it.

Zoll: Let's talk about that for a moment. When you say "persuasion literate," what exactly do you mean?

Shadel: Well, we did a series of studies. The law enforcement gave us 500 undercover fraud tapes of various scam artists. What they do is when an older person in particular gets called by scam artists, if they fall once, they get hundreds of calls. What the investigators would do is have those calls forwarded to the investigator's desk, and when the phone rang the next time the scam artists would call, the investigators would pretend to be the elderly victim and tape record all the calls. Well, they gave us hundreds of these calls, and we transcribed them and coded them to see whether there are common persuasion tactics that are true for all of these different types of investment scams. And we found in fact that they were.

The next step was to, say, expose victims to those and see whether they're more interested in them than the nonvictims, and that's what we found. So, for example, one of the persuasion tactics we call "phantom fixation." A phantom is something that you want, but you can't have and this is the most common tactic we found in all the fraud tapes, where they will dangle a 10-to-1 return or 5-to-1 risk-free return. Well, when we use those same statements and expose the victims, people we knew who have lost money to fraud, to those same persuasion tactics--the phantom claim--they show increased interest beyond what the general public would show even after they've been taken. So, this has given rise to us going out and doing a lot of talks where we say, "Here is the persuasion tactics that people use. If you see that coming from a distance, beware."

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