Immunity from frauds

The other day, while browsing some podcasts about financial fraud, I came across the tale of a British lady named Juliette D'Souza. During 1998-2010, she befriended and swindled many rich people in the UK. Like most successful frauds, her victims believed her and gave her the money willingly. She seems to have extracted around 5-10 million pounds and a great deal of valuable property, including four flats in London. In 2015, she was indicted for duping 11 of her victims and jailed for 10 years.

As an individual pulling confidence tricks on other individuals, this is quite impressive, but obviously, it's just a loose change compared to masters of the game like Sam Bankman-Fried of FTX. In his case, the victims believed him and gave him the money willingly, but he could leverage the crypto madness and the internet to pull his fraud on an industrial scale.

However, I do feel that at the level of the psychology of the individual victims, the case of Juliette D'Souza is more interesting and instructive. When someone falls prey to a global fraud like crypto or even this digital startup racket that's going on, there's some excuse that millions of others did too. Mass delusions mean that the individual gets influenced by the logic that if so many people are doing it, and the media, as well as the financial industry, is supporting something, then there must be something in it.

However, individual frauds follow a different logic. This lady claimed some supernatural or other-worldly powers and got people to pay her for all sorts of things, including personal, financial and other-worldly success. In each case that has become public, the victims ended up believing huge lies that were completely outside the realm of any reasonable framework of reality. Most of the victims were successful in their lives - obviously, they had to be because they were all prosperous enough to be lucrative victims. In their professional and business lives, they were competent people who appeared to understand how the world works and could deal with it quite well. They had what one might call an accurate model of reality.

Yet, when faced with the con, they proved to be gullible beyond measure. Their belief in their understanding of how the world worked was not deep enough. Many successful people feel that their success is a fluke and there is some other secret to getting through life. That's their mental model of how things work. When it comes to investing, I have long observed that different people have different models. Here's the commonest. 'There are people who know when a stock's price is about to rise. If one of them tells me, then I can make money.' This is the 'tip' model of the stock markets. It isn't so much a mental model as the lack of one. Unfortunately, this is a very common one. There seem to be a lot of people who believe that someone out there knows which way things will move, and everything depends on somehow getting to know these secrets.

A little broader than the 'tip' model is the 'operator' model. Under the operator model, people believe that there are people ("operators") who manipulate stocks and what one needs is to figure out what the operators are doing and then somehow manage to ride the stock while the operator is pushing it. This model is realistic. Outside the big, high-volume tickers, many stocks are routinely manipulated by the so-called 'operators', at least in the short-term. However, this model is useful only for the operators themselves. If you are not an operator, you are at considerable risk of giving away your money to an operator. There is, of course, yet another model. This one is about observing how much companies earn and estimating how much they'll earn in the future and how they'll compete and other things like that. Compared to the other two models, few seem to believe in it.

There are plenty of frauds in the investment world, too, but those with one of these mental models are immune to them. Guess which model is the one that gives you immunity to fraud.