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ON FEB. 7, 1910, AN ODD event occurred in the English town of Weymouth. A group of five arrived for a tour of HMS Dreadnought, a battleship that was the pride of Britain’s navy. The five were welcomed with fanfare, their staff having communicated in advance that they were members of the Abyssinian royal family. Their appearance was impressive: flowing robes, great jewels and turbans. Through an interpreter, the Abyssinian emperor offered military honors to the ship’s crew. The sailors then led the royal delegation on a private tour.
It was an enjoyable visit for all. The only problem: The “Abyssinians” were pranksters. They weren’t Abyssinians, but English, and included the author Virginia Woolf. The language they appeared to be speaking was gibberish, a mix of Greek and Latin that they threw together. When news of the hoax hit the papers, the lapse in security caused embarrassment for the Royal Navy. Most notable was the fact that the commander of the Dreadnought, William Fisher, didn’t recognize that two of the fake Abyssinians were his own cousins.
I was reminded of this incident a few weeks back when my phone rang one morning. On the other end, an authoritative-sounding voice let me know that I was the subject of an investigation. The government, this fellow said, had seized a package addressed to me. It contained cash, weapons and other contraband, and he wanted to know whether I had ordered these materials. This call would have been unnerving if it hadn’t been so obviously a scam.
I’m not sure how this particular scheme works, but it seems to be the latest in a long line of similar scams. You’ve probably heard, for example, of the “Nigerian prince” scheme. Out of the blue, someone receives a call from an individual pretending to be a wealthy Nigerian. His money is locked up, he says. But if you send him $1,000 today, he’ll gladly repay you $10,000 when his funds are released.
These sorts of schemes seem like they shouldn’t work—but, unfortunately, they do. I personally have seen someone fall for the Nigerian prince scheme and send money to the scammer. Though it was clearly a fraud, it was difficult for the victim to recognize it.
Why does this sort of thing happen? How can people be so gullible? The most obvious explanation, of course, is profit—or the promise of profit. In an article earlier this year, Jason Zweig of The Wall Street Journal discussed the popularity of Regulation D private offerings. These investments are illiquid, speculative, susceptible to conflicts of interest and typically carry high fees.
Zweig characterizes these investments as “dreck,” and yet, despite the risks, he notes that investors have plowed nearly $1 billion into these funds over the past two years. Why? While each fund is different, these private offerings—not unlike Bernie Madoff—promised investors returns in the neighborhood of 10% with little downside.
Why don’t investors look at these investments more critically? In The Confidence Game, Maria Konnikova offers another explanation. Humans, she says, “have a strong bias toward misperceiving the world.” Citing the research of psychologist Shelley Taylor, Konnikova explains that even pessimists have a built-in bias toward positivity. We generally believe that things will go well for us.
Research has quantified this. In 1990, psychologist Robert Vallone conducted an experiment among university students. He asked them to make a set of short-term predictions—about their grades and other aspects of their life—and then followed up with them at the end of the semester. The students almost uniformly overestimated how well things would go. About 70% of the predictions were overly optimistic. The upshot: When fraudsters approach us with appealing opportunities, most people don’t assume it’s a trap.
Still, people aren’t completely gullible. As Konnikova explains, scammers know they need to offer “evidence” that what they’re promoting will work out. A famous early Ponzi scheme—which predated Charles Ponzi himself—was perpetrated by William Franklin Miller in 1889. Miller began by offering investors a return of 10% per week. While that seems absurd, the nature of a Ponzi scheme is that it does work out for early investors. Miller took on his first investor in March 1889 and, sure enough, began paying out the promised 10% per week. That drew in other investors. Within months, he had accumulated more than $1 million of investor money.
Ponzi schemes, fortunately, are rare. More common, though, are the sorts of investments Zweig described: They aren’t criminal, but they’re speculative. They’re able to draw people in by cherry-picking some attractive past returns or by highlighting some past success of the manager. As with a Ponzi scheme, that “evidence” helps investors look past any red flags.
What can you do to avoid these kinds of traps? I recommend a two-part approach. First, keep your investments simple. Wherever possible, opt for investments that are publicly traded, broadly diversified, passively managed and carry low costs. Follow that formula, and you’ll almost certainly avoid the Ponzis and the Madoffs. You’ll also be in a good position to avoid the “dreck” that Zweig describes.
Second, guard against scammers. This step is a bit harder because crooks can be creative. There are, however, relatively easy steps we can all take to batten down the hatches on our finances. These include:
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.
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I’ve read a couple of articles that have mentioned not engaging in conversation with callers you don’t know or are suspicious about. Apparently, with the ever “advancing” abilities of technology, your voice can be recorded and programs can learn your speech patterns and come pretty close to sounding like you on a call they generate for devious reasons.
Good advice given in this article. Unfortunately, the thieves just keep coming up with new ways to separate you from your money.
A few years ago my wife and I were having an annual in-person investment review with our advisor. I told him that I had $100,000 coming in the next few weeks from the estate of a long-lost Nigerian relative, and asked him for advice to invest that sum. He got an alarmed look on his face, but I could not contain my laughter at his reaction. Then we went back to serious discussion.
A while ago, I decided unwisely to stop reading scam prevention articles thinking out of arrogance I was too savvy to get taken.
Adam, another great post! Thanks!!!
Per The Nigerian Prince Scam …
I can’t remember if it was ‘The Onion’ or some other satire website that had an ‘article’ about a Nigerian Prince who had died. And when they checked his apartment it had $BILLION$ in dollars he had been trying to give away. Ha Ha Ha
Unfortunately these scams keep getting people to give them real money.
Some are, I guess, pretty believable.
The one about a grandson being jailed in Mexico and needing $15,000 in bail money just MIGHT have worked on me.
But, at the time, my oldest grandson was 7 … so I figured it wasn’t legitimate.
OTOH, I can easily understand how a concerned Grandparent could be taken in.
Apparently there really was a Nigerian “prince” who died with $43 million in his apartment, which might have been what you were remembering.
Very sad are the online romance scams . I worked with a woman who gave over 100k to someone she never met but who professed their undying love to her over the internet. She developed credit problems , couldn’t pay her property taxes, accepted loans from coworkers to pay those taxes and then didn’t pay them back. Needless to say, office relations became strained.
Wow — that’s terrible. In the past, when I’ve read about romance scams, they’ve usually involved lonely seniors, not those still in the workforce.
Coincidentally, CBS Sunday Morning, July 30, 2023 had an episode about similar issues.
https://www.cbsnews.com/video/recognizing-online-scams-a-tragi-comedy-in-4-acts/
The simplest solution to a lot of this is to only answer calls from known numbers. These days your phone knows your contacts. If the number is shown without a name, don’t answer. If the caller is legit she will leave a message. Unless you have an urge to “torture” a scammer, why would you pick up for an unknown number? When I still had a landline with no number recognition I turned the ringers off, so I only answered callers who left a message (and not all of them).
It used to be possible to get an ATM-only card, but sadly my bank doesn’t do that any more.
Edited to add that it’s possible to block calls from unknown numbers on both iPhones and Android, but that might be excessive.
I implemented your solution a couple years ago and happily the volume of nuisance calls on my cell phone dropped off sharply over time. I’m not in a stage of life where blocking all unknown numbers would be wise. As you say, if the caller is legit she will leave a message.
Not only did I learn some good tips from your post, but it lead me to also learn Ethiopia was known as Abyssinia before WWII and Abyssinia is also a long eared breed of cat. What a way to start a Sunday morning. 🤓
For a couple years we would get almost weekly calls from ‘Microsoft Tech Support’ informing us that our computer was infected by a virus and they were going to help us out. We never told them that we only had Apple computers at the time. It was more fun to hand the phone to our teenaged son and let him waste their time as long as he could.
My mom fell for this, and I had to remove the malware they installed.
My Mom used to get those calls, among many others. The thing is, she’s 91 and doesn’t own a computer. And now, she doesn’t have a landline anymore, only her cellphone. The calls stopped.
Adam, you stir up a number of thoughts. Several years ago, a call from “Special Agent Smith of the IRS” cause my heart to drop, until I recognized my friend’s voice, even though I had no reason to fear. But, even now, I have a little uneasiness wondering if I’ve done all I can to keep my information and money secure, and that of my older relations. I’m overdue for a thorough review of my safeguards. I’m also tardy at finishing Churchill’s history of WWI, which my daughter and I have been reading simultaneously, but separately. Old Fisher should have known that most English in 1910 didn’t look anything like Abyssinians.