My One Best Tip to Avoid Affinity Fraud

Have you ever heard of affinity fraud?  It’s a scam that exploits the trust and friendship that exist in groups of people who have something in common, an affinity. The SEC has a webpage devoted to alerting investors to affinity fraud.  The SEC provides a run-down on how affinity works, some recent affinity fraud schemes, and tips for avoiding affinity fraud, such as:

  • Check out everything, no mater how trustworthy the person who brings the investment opportunity to your attention seems.
  • Do not fall for investments that promise spectacular profits or “guaranteed” returns.
  • Be skeptical of any investment opportunity that is not in writing.
  • Don’t be pressured or rushed into buying an investment before you have a chance to think about – or investigate – the “opportunity.”
  • If you receive an unsolicited e-mail from someone you don’t know, containing a “can’t miss” investment, your best move is to pass up the “opportunity” and forward the spam to us at enforcement@sec.gov.

There are all really good tips.  Go to the Investor Alert: Affinity Fraud page for the whole shebang.  But I’ve been thinking:  what’s the underlying fallacy that causes otherwise intelligent people to fall for affinity fraud.  There’s a cognitive bias that makes affinity fraud work:

In-group Out-group Bias

There’s a bias to believe that members of your group are better people than those who are not a member of your group. This will predispose you to have positive attitudes and supportive actions toward members of your group.  This error in thinking is the engine of affinity fraud.

Knowledge of this bias is the core of my one best tip to avoid affinity fraud:

Be aware of your cognitive biases, and do not think that you’re an exception from them.  Then beware for people who appeal to those biases.

Advertisements
This entry was posted in Investments. Bookmark the permalink.