Scams fool the money-wise

Maybe you're smart about money. But are you scam-savvy?

A recent study has found that knowing about finances doesn't necessarily make you immune to con artists who know how to push the precise psychological buttons to get at your savings.

One of the study's most surprising findings: Investment-fraud victims — people who lost $1,000 or more to investment scams — are significantly more financially literate than people who have never been victims.

That's leading some to call for a new, more sophisticated approach to financial education to ensure that consumers know as much about spotting a scam and resisting the emotional trickery of con artists as they do about basic investing principles.

"It suggests financial education is necessary but not sufficient to inoculate people from fraud," said Doug Shadel, state director of AARP Washington, who co-wrote the study. The work was commissioned by the Investor Education Foundation of the NASD, the securities' dealers association.

"Everybody is doing financial literacy, every bank and government agency," Shadel said. "That's not a bad thing, but it's not enough."

The findings were the focus of a "senior summit" convened in Washington, D.C., earlier this month by the U.S. Securities and Exchange Commission.

Seniors are disproportionately victimized by fraud and protecting them is an emerging priority for the commission, SEC spokesman John Nester said.

Some 75 million Americans will turn 60 in the next two decades, he noted, and 91 percent of the nation's net worth is held by people aged 40 to 59.

"They are a very powerful force in the markets ... and a very tempting target" for con artists, Nester said.

Shadel recently interviewed a retired California businessman who lost more than $500,000 in an oil and gas scam after receiving a slick brochure about the "opportunity" in the mail.

Over six months, he was bombarded with phone calls from con artists encouraging additional investments. He eventually lost all of his savings. He told Shadel he doesn't understand how he could have been suckered into such a scam.

"It was not because he lacked understanding of the markets," Shadel said. "But he was caught in a complex web of these persuasion tactics, and he wanted to believe it."

Likely victims of scams

Shadel's work, conducted with co-author Anthony Pratkanis and the Consumer Fraud Research Group, began with an analysis of high-pressure telemarketing calls secretly recorded by undercover investigators posing as victims.

They found more than 1,100 techniques used by con artists to bully, sweet-talk and wheedle their victims into giving up money or personal information.

But why do some people fall for scams while others don't?

Shadel and the research team zeroed in on victims of investment fraud and lottery scams — two of the most common schemes that victimize older consumers — to try to answer that question.

They used focus groups, in-depth interviews and a survey of 165 victims and 150 nonvictims.

They found that financial-fraud victims are demographically distinct from those who haven't been victims. Investment-fraud victims are more likely to be married men living with one or more people, with at least a college degree and earning more than $30,000 a year.

Compared with nonvictims, they are more likely to rely on their own judgment in making investment decisions, rather than seek advice, and are more optimistic about the future.

Lottery-fraud victims have completely opposite characteristics, they found. They tend to be widowed women living alone with lower education and income levels.

Lottery and investment-scam victims tend to experience more negative life events (financial trouble, illness, the death of a spouse) than nonvictims, and thus may be more emotionally vulnerable.

Both victim groups tend to be more open than nonvictims to unsolicited sales pitches. And both groups of victims tend to downplay the fact they were taken in by scams.

Researchers knew all the victims in the study had lost $1,000 or more, but half of the investment victims and a quarter of the lottery victims told researchers they hadn't lost any money.

Financially savvy victims

But the biggest surprise for the researchers was how financially savvy the investment victims were.

The researchers asked victims and nonvictims a series of financial-literacy questions.

"Our hypothesis was the victims would score lower; that if they just knew more about money, they wouldn't be victims," Shadel said.

But investment victims answered nearly 60 percent of the questions correctly. Nonvictims answered 41 percent correctly and lottery-scam victims answered 32 percent correctly.

The findings suggest that one-size-fits-all financial education doesn't work, Shadel said. "Con men ... customize their pitches to fit their victim's profile," and consumer advocates should do the same with their prevention messages, he said.

State's fraud level high

While Shadel's work was national in scope, consumer fraud is of particular concern in Washington. The state ranked No. 2 last year in the highest per-capita rates of reported consumer fraud among the 50 states.

Shadel plans to use the study's findings to launch a new investor-education campaign on behalf of AARP and other organizations next year in Washington.

The findings also will shape senior-outreach efforts being planned by the NASD Investor Education Foundation and the SEC.

Ultimately, Shadel said, he would like to create a "vulnerability index" to measure an individual's likelihood of being scammed, a tool that could help caregivers and educators better protect vulnerable seniors.

Jolayne Houtz: jhoutz@seattletimes.com; 206-464-3122