International Law

FTC to Study Fraud Empirically - Finally!

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The FTC has finally decided to start studying fraud and not simply rely upon the discredited notion of disclosure for prevention.  

The FTC held a workshop earlier in the year about consumer fraud.  

From that workshop, the FTC made a decision to try empirically understand the deterimanents of consumer fraud.

The [FTC] Commission has also conducted telephone surveys in 2003 and 2005 designed to measure the proportion of the U.S. adult population that has fallen victim to various consumer frauds.

Despite this,surprisingly little is known about what determines consumers' susceptibility to fraud. 

For example, the 2003 and 2005 FTC Consumer Fraud surveys found that education was not a significant predictor of fraud victimization.

Understanding when and why people are vulnerable to fraud would better inform the FTC's substantial, ongoing efforts to fight fraud through law enforcement and consumer education.

Any additional insights into how and why people fall victim to fraud could also help improve any future fraud surveys the Commission may undertake.

The study announced in this notice is a preliminary and exploratory step toward facilitating those efforts. 

The study is not intended to lead to enforcement actions; rather, study results may aid the FTC's efforts to better target its enforcement actions and consumer education initiatives, and improve future fraud surveys.

Economic and psychological experiments have identified several decision-making biases, such as impulsivity, over-confidence, overoptimism, and loss aversion, that can cause inaccurate assessments of the risks, costs, and benefits of various
choices. 

FTC staff proposes to conduct an economic laboratory experiment to study whether these types of decision biases are related to consumer susceptibility to fraudulent or deceptive marketing claims.

Staff intends to study consumers' assessment of potentially deceptive advertisements, in addition to their assessment of non-deceptive advertisements. 

Staff seeks to understand which characteristics of individuals and advertisements predict consumers' ability to differentiate between apparently fraudulent materials
and apparently legitimate materials.

In addition, David Vladeck, Director of the Consumer Protection Bureau, FTC asked for significant powers:

The Commission makes four important recommendations to improve the Commission's ability to protect consumers from scams and deter would-be fraudsters, including:

(1) increasing resources committed to tackling fraud;

(2) authorizing the agency to employ notice and comment rulemaking procedures for unfair or deceptive acts and practices under the FTC Act;

(3) expanding the FTC's authority to seek civil penalties in its own right in federal court; and

(4) giving the FTC the authority to challenge practices that aid or abet violations of the FTC Act.

To return to the empirics, the experiments that the FTC has chosen are not the ones I would have used to study business opportunity and franchise fraud. 

In my years of dealing with victims of business opportunity and franchise fraud, two biases stood out: confirmation bias and anchoring.  

Confirmation bias ensured that the victims did not look for negative features, and anchoring on unrealistic earnings claims persuaded the victims that this was the real deal, even after they had "discounted" the earnings claims by a factor of 1/2 or 1/3, just to be safe.

Some heuristics make us smart, and others are just errors of reasoning.  

It will be difficult to learn from laboratory results when reliance on heuristics enables consumer fraud, precisely because the con criminals use the same compliance techniques that legitimate marketeers employ.

Influence: Science and Practice (5th Edition), written by Robert Cialdini, makes this point very well.   

"The underlying theory is that people tend to be hardwired to respond to certain stimuli in predictable ways. The book tells you what those stimuli are, that is, how to push people's buttons."

To prevent fraud, we need to:

a) be able to identify these hardwired situations in advance;

b) develop a potential response, and;

c) be able to practice our responses.

Some of this work was already started by Anthony Pratkanis, who gave an overview to the Senate Committee on Aging about telemarketing fraud:

"First, we have learned that the weapon that is used in fraud crimes is social influence. 

No one knowingly gives their hard earned cash to a con criminal - they think that they are making an investment, winning a prize, providing for charity, or some similar positive goal. 

The con criminal is a master at using one high-powered influence tactic after another to sell a deception. 

Given that the weapon in a fraud crime is an invisible one - social influence as opposed to a gun or a knife - there is a tendency by both victims and observers not to recognize economic fraud for what it really is - a crime. 

Recently, Doug Shadel and I analyzed over 250 undercover tapes used in fraud investigations. 

In these tapes law enforcement took over a victim's phone line and then tape recorded the con criminal's pitch. 

In listening to these tapes, we found that con criminals would play different roles - authorities, friends, even dependents - to create a platform of trust. 

They would then use many well-established social influence tactics to sell the crime."

Full post as published by Misleading Advertising Law on July 14, 2009 (boomark / email).