Scam Psychology: Cognitive Biases that leads to bad money decisions

Recently Lifehacker posted an article about cognitive biases that lead to bad money decisions. They are, obviously, perfect described the mindset of an MLMer.  Indeed, MLMskeptic here has covered most of them.

Sunk-Cost Fallacy -- if you have put money and effort in, you would not want to give up. This is also related to "Ikea Effect".


Choice-Supportive Bias -- also known as post-hoc rationalization, you made an impulsive decision NOT supported by logic, and later you tried to come up with reasons why you made that impulsive decision.  You will even rewrite your history and memory to somehow "prove" that you made the right decisions.

Anchoring Bias -- you rely too heavily on the FIRST piece of information and let that information affect your subsequent decisions, even of that first info is outrageous or wrong. Even when you are shown proof that the initial information is wrong, you fail to correct yourself and your thought process.


Bandwagon Effect -- "everybody else did it" somehow proves that it's logical, even when scams can have millions of victims. Popularity does not prove veracity or truth.


Status Quo Bias -- If you prefer the things the way they are, even though it's bad for you, you're definitely affected. Scam victims often refuse to take action to protect themselves because they believe they cannot be in a scam, and they want to "wait things out" even as the scam continue to take their money and provide one excuse after another.


But go read that article.

Related articles

• Scam Tactic: "Don't knock it until you try it" slogan is very bad advice(amlmskeptic.blogspot.com)

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• Scam Psychology: "You have to try it to understand it" fallacy(amlmskeptic.blogspot.com)

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• Scam Psychology: Luck Blindness, or why lucky people see it as skill, not luck(amlmskeptic.blogspot.com)

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Cognitive Bias: Status Quo Bias

Status quo bias goes by many names, but to put it simply, "if it works why change anything"   Any change form the current situation is judged to be unacceptable.

Scam victims often suffer from status quo bias, esp. after they learned the scheme they've latched onto or recruited into isn't on as firm legal and financial footing as they were lead to believe. Even when presented with all the evidence that they are in a scam, they will keep saying "I don't know if XXX is a scam. Time will tell." They don't want anything to change, even when more viable alternative such as attempt to withdraw from the scheme, report fraud to the police, and so on seem to be more reliable method of dealing with the fraud.

Status quo bias is often mixed up with other biases, such as loss aversion, sunk cost fallacy, longevity (appeal to age fallacy), endowment effect, regret avoidance, and more.

Why Do We Have Status Quo Bias

Behavioral Economists Kahneman and Tversky published a paper back in 1982 that found people feel greater regret for bad outcomes that result from new actions taken, than for bad consequences that are the consequences of inaction. In other words, if doing something is bad, and not doing anything is also bad, people tend to do nothing. One possible explanation is people can then blame circumstances (I didn't change anything, circumstances changed) rather than take responsibility for their own choices. This is a fallacy, of course, since choice to do nothing is still a choice.

How Status Quo Bias interacts with other biases

Endowment effect is also known as "divestiture aversion" in behavioral economics. Basically, people ascribe more value to things merely because they own them. It's also related to "mere ownership effect" in social psychology.  It can be described simply as "once you have it, you will want to keep it than give it up".

Sunk Cost fallacy is related, in that "once you started on a course of action, you justify your continual involvement by claiming you already spent effort and resources (sunk costs) and you cannot let it go to waste when it seems more prudent to cut the losses and change course."

As an example of endowment effect, people will often pay more to retain something they own, than to obtain something they do not own, even when there is no reason for attachment, and even when the object was obtained merely minutes ago.

Dan Ariely and Ziv Carmon did a test on hypothetical selling price (willingness to accept) NCAA Final Four tournament tickets. They found that the ratio of WTA (willingness to accept) vs WTP (willingness to pay) is 14 to 1. In other words, those who have the ticket want 14 times higher the price those that don't have the tickets are willing to pay.