Monday, September 17, 2012

Bad Argument: Communal Reinforcement

Daniel Kahneman
Daniel Kahneman (Photo credit: Wikipedia)
When you "hang out" with a group, you conform with the group. You become more like the group. This is normal, as you seek out people who are like you. Humans are social, so group conformation is also normal.

However, this can often be exploited by scammers, esp. if he is "leading" the group, through a phenomenon known as "communal reinforcement".

Daniel Kahneman described it best in his book Thinking, Fast and Slow : "We know that people can maintain an unshakable faith in any proposition, however absurd, when they are sustained by a community of like-minded believers" (p. 217).

This is very apparently when it comes to pyramid schemes and Ponzi schemes, where the "community" aspects of the scam made them heavily reliant on communal reinforcement. And with modern communications you don't even need to be in physical proximity to maintain a community of like-minded believers.

A modern ponzi scheme or pyramid scheme is a fraud that disguises their business model. They claim to be doing something legit and sharing the profit, but in reality they're just "robbing Peter to pay Paul". Charles Ponzi claimed to be doing arbitrage of International Reply CouponsBernard Madoff claimed to be investing all that money. Andy Bowdoin (of Ad Surf Daily Ponzi) claimed to be selling "ad packages". Paul Burks (of Zeek Rewards Ponzi) claimed to be selling bids for penny auctions. In reality, each of them is just shuffling money around, pay early members with money from late-joining members. The business they claim to be in contribute a minuscule portion of revenue, if at all.

In each of the four Ponzi schemes named, logical analysis of some of the results would have easily shown that the business each scheme claimed to be engaged in could NOT have contributed nearly enough revenue to be funding the payout people are getting (except possibly Madoff). However, the individuals in such "communities" were told by leaders (either Ponzi leader himself, or media, or local leaders) that their business model makes PERFECT sense, and any critics are liars with their own agenda. This happened over and over.

In case of Charles Ponzi, local newspaper calculated that there is not enough international reply coupons in circulation around the whole WORLD to generate the returns he was claiming.

In case of Bernie Madoff, people had been complaining to SEC as far back as 1999 that Madoff's return makes absolutely no sense, based on various types of analysis, stock movements, and so on. Nobody can figure out how was Madoff generating that sort of return without any one noticing! Turns out, he didn't move any stocks! AT ALL!

In case of Ad Surf Daily / Andy Bowdoin, there was NO documented source of external revenue other then "other members buying ads, and you view them, while you do the same, you buy ads, and other people view them". So how does this turn a profit? When you subtract operating expenses, this should be a net loss!

In case of Zeek Rewards / Paul Burks, there was minuscule amount of actual auction going on, and potential revenue snapshots of random days can only document less than 300K of revenue per day, or 9 million a month, even though it is paying out well over 12 million a month in 'profit sharing' which is supposed to be "50% of the profit"! The actual figures were even MORE shocking... it paid out 170 million in July 2012, and the amount of revenue that did NOT came from affiliates is roughly... 2% (according to SEC complaint). That means they paid out 100x more than they should according to their own explanation! Their own explanation is completely bogus!

Yet each of these Ponzi schemes told a story good enough for plenty of people to BELIEVE them, and because they are in a community, members are subject to community reinforcement. This doesn't always happen though. Some Ponzi relies on secrecy and exclusivity, where members never see each other.

Charles Ponzi once settled a "run" of withdrawals from his business by acting very calm, very friendly, paid off the first few hundred people, while handing out coffee and donuts to the rest. That convinced others to leave the money with him.

Bernie Madoff kept out of sight, preferring to let other investment managers give him the funds, so he doesn't have to meet with people, and when other people ask too many questions, he gets huffy and tell them to leave, he doesn't want their money. This makes the people who have money with Madoff to feel exclusive and cared for, but most people who lost money with Madoff don't even know their money is with Madoff because their money manager is the one who gave Madoff the money.

Andy Bowdoin held "rallies" in various cities where he had local reps invite potential recruits. He also held various online meetings, conference calls, and made Youtube videos where he, or other members made statements touting the program, and locals often did their local sales meetings and recruiting events where they play the video, and the head started answering questions to fish for recruits. Once you're in, you are kept in through efforts of leaders and conference calls and virtual meetings and whatnot.

Paul Burks, and his lieutenants: Darryl Douglas, Dawn Wright-Olivarez, Alex deBrantes, and a few more ran monthly "Red Carpet Events" in Lexington NC, as well as weekly "training calls" and "leadership calls" which are basically online audio lectures / conference calls. They also have websites for "news", and support forums where affiliates go. Individual affiliates also made their own websites, forums, and so on.

Pyramid schemes, and the Ponzi/Pyramid-hybrid schemes, that relies on recruiting and downline building, use "communal reinforcement" heavily to keep the members compliant with the wishes of the leadership. Zeek was known for some very odd metaphors used in these meetings. One metaphor for compliance is "flip your toilet paper roll", while another is "hamburger".  In the final days, member compliance is so serious that you may be terminated for saying the wrong words.

Once the members are compliant, they can be further pushed into even more... ridiculous beliefs that just has no basis in reality for us outside the scheme, but seem to be perfectly reasonable for them inside.

For example... Who are the victims in Zeek? The affiliates, right? What if victims refused to acknowledge themselves being victims, but instead, points their anger at the critics (who brought in the law), the government (for shutting the thing down), fellow affiliates (for being snitches, complainers, negative people), instead of the real culprit: leader of the scam?

The Dispatch of Lexington NC (home of Zeek Rewards Ponzi) published an article on 12-SEP-2012 that the Ponzi have stunted local economy.  Here's what the first comment says:

"There were no victims until the government came around." -- Curt Miller

This is an interesting viewpoint, as it demonstrates a fundamental absurdity, or blindness to the truth.

Question: when does a fraud victim realize he is a victim?

Answer: when he acknowledge that he had been defrauded.

Thus, if a fraud victim doesn't even realize he's defrauded, then he doesn't consider himself a victim, even though he actually is a victim.

So the idea of "there were no victims" is a lie. There were indeed victims. They just don't know they are victims.

And if they don't know they are victims, then can you really trust anything they say?

Ignorance is NOT bliss, and the more you hang out with like-minded people, the more ignorant you become.

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