Friday, August 30, 2013

Why Zeek Rewards Was Such a Successful Scam

Magic ball toss
Magic ball toss (Photo credit: backofthenapkin)
Zeek Rewards Ponzi, closed by SEC last year, is the largest Ponzi scheme in the US, involving up to 2 million victims (due to some people having multiple accounts, the actual number is closer to 1 million) for 700 million dollars. How did it get so big? Don't people care about the warning signs? Are they all so blind? These aren't the smartest people in the world (we are talking the average Joes, not the elites like those Madoff soaked) but surely there are SOME smart people in that million victims?

It is a combination of factors, and it had everything to do with psychology, by taking advantage of your cognitive biases.

Your brain, due to millions of years of evolution, tends to form thoughts in certain ways, and a successful scammer can take advantage of that.

Think about magic. A lot of magic relies on misdirection. The magician tosses the ball up and down, up and down, followed it with his eyes. Then he tossed the ball up... and it vanished.

No it didn't. He didn't actually throw the ball up, but his eyes went up as if he did. And you, expecting him to do the same thing again, didn't actually look at his hand with the ball.

In other words, you were "trained" by the magician to follow his eyes, not the ball itself, so you were amazed at the ball vanishing into the air... when it never left his hand.

Zeek did the exact same thing... It showed the victims enough of a legitimate business that the victims never bothered to follow the IMPORANT item... the money.

Is it any wonder that Paul Burks, head of Zeek, is a trained magician? 

But wait, there is more!

Some of the most ardent defenders of Zeek, even today, maintains that they have EARNED their money through those ads they placed, when logically those ads are worthless. ( Two reasons: 1) The links does not seem to drive up Alexa ratings, and 2) You can easily hire some third-world kids online to post those ads for pennies ) So why are they so adamant in believing they were working for their money? Turns out, it is "in our nature".

Psychologist Daniel Ariely, in his book "Upside of Irrationality", explained that mammals, esp. humans, have an innate need to "work for reward and recognition". Indeed, all animals seem to (except cats, but that's a different problem). This phenomenon is called "contrafreeloading", and it was discovered by zookeepers whose animals apparently got very bored and either self-mutilate or just go depressed and die.  Thus, zookeepers and animal psychologists coined this term "contrafreeloading". Instead of merely feeding the animals, not needing them to do anything to earn food (i.e. freeloading), they make the animals do certain activities that will challenge their brain somewhat, such as hiding food inside some mechanisms that need to be manipulated to release the food. 

When the experiment was done to lab mice, who were trained to choose between a lever that dispenses food pellets one at a time, and a cup full of food pellets, mice generally do half and half: push lever for food half the time, and pick up free (no work) food half the time, even when logically it should have only went for the free food (no work needed).  (a few out of 200 did like freeloading though)

Humans act very similar. Humans don't want PURE handouts, but the job better not be too difficult either. Remember the stories about people in Great Depression don't get pure handouts? That teams supposedly dug trenches one day, then filled them back the next day? People need to feel they did something to earn that money. 

That's why Zeek Ponzi's "post ads for profit share" disguise worked so well... It made all the victims feel they were doing something. Zeek could have easily left that component out, and just say "just buy the bids and share in our daily profits". But that would make it look REALLY like a Ponzi scheme. By adding this "busy work", Zeek managed to make all the victims feel they *earned* their money, when the truth is what they did was equivalent of a drop in the ocean. 

This also has a couple effects, all of which helped Zeek perpetuate itself. One of them is known as the Ikea effect, coined by Dan Ariely and his colleagues. Ikea effect basically points out that once you had a hand in the project, you feel "ownership" to it, and thus you will really defend it no matter how lacking in merit your position is (much like you really like the Ikea furniture you put together, no matter how crooked and unfinished it is). By involving you in that worthless ad posting, Zeek managed to hit you with the Ikea Effect, making you feel that you "own a business", and as a result, you felt obligated to defend it against the critics, and perhaps, even convince yourself NOT to pay attention to the doubts gnawing you in the back of your mind.

But what if you did pay attention to the doubts? Next thing to hit you is known as the Sunk Cost Fallacy. Human being have a cognitive bias in that once we decided on something, it will generally take a lot of effort to change course, esp. if we have something "at stake", such as "potential income" promised by a scam. Humans are naturally "loss averse", in that we don't believe in "giving up" something, even in exchange to gain something. Scammers generally have to lie quite convincingly to entice victims to give up their money for huge potential gains. Once the victims see the "potential gains" (even if it's just some numbers on a computer screen) he felt he owns that money ("Ikea effect") and refuse to consider losing it even though he doesn't actually own it yet. They already spent money (sunk cost) buying those worthless bids, and they feel they have to at least stay in it long enough to attempt to recoup that initial investment, and maybe even to the potential gains. 

Such "Ikea effect" of ownership would also explain why these victims, even today, persist in their belief that SEC broke up a real business. They felt they own that money when it's clearly other people's money. 

Which brings us to one more public service announcement... You only have a few days left to file your Zeek Rewards ponzi victim claim. Deadline is September 5th, 2013. 

And if you are one of those net winners... Settle with the receiver soon, or else expect to see subpoenas and/or court judgements ordering you to pay up. 

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