FOUR-STEP MODEL OF Submitted by Pranay Dubey

Submitted to Anshu Singh

GULLIBLE INVESTING Enrolment no.

210021103221010
CASE STUDY
A case in Montreal in which an unlicensed financial advisor named Earl
Jones took advantage of the social vulnerability and naïve trust of elderly
women
A case involving an internet inheritance scheme associated with Nigerian
“419” scams
The massive Bernard Madoff scandal
EARL JONES FINANCIAL ADVISOR
Earl Jones ran a Ponzi scheme of around
$51.2 million in Canadian (1982 to 2009 )
Jones would go about offering investment
advice and claim to sell securities
unregistered for 30 years.
he spent $13 million to finance his lavish
lifestyle and over the years returned $37
million to his investors as an interest to
maintain his Ponzi scheme.
Eventually the money coming into Jones ran
out to collapse the scheme leaving 158
victims
NIGERIAN “419” SCAMS
The 419 advance-fee scam is a
particular type of Advance Fee
Fraud that emanates from Nigeria.
Fraudsters typically target
individuals via email, telephone or
social media asking for an advanced
payment in return for huge financial
rewards.
419 scams were named after the
Nigerian legal code they violate.
CONTINUED
According to analysts, the total losses from 419 scams in 2005 were $520
million (£275m) in the UK and $720 million in the United States alone.
In this price paid by victims is much greater than a financial loss. In 2007, a
Chinese student at the University of Nottingham committed suicide after
she discovered she had fallen for a lottery scam
THE MASSIVE BERNARD
MADOFF SCANDAL
Bernie Madoff was a money manager responsible
for one of the largest financial frauds to date.
Bernie Madoff's Ponzi scheme, which likely ran
for decades, defrauded thousands of investors
out of tens of billions of dollars.
Investors put their trust in Madoff because he
created a front of respectability, his returns
were high but not outlandish, and he claimed to
use a legitimate strategy.
In 2009 Madoff was sentenced to 150 years in
prison and forced to forfeit $170 billion.
As of December 2018, the Madoff Victims Fund
had distributed more than $2.7 billion to 37,011
victimized investors in the U.S. and around the
world.
FOUR-STEP MODEL OF
GULLIBLE INVESTING
In this model, gullible action is
Situation viewed as an outcome which occurs
as the result of the independent
contribution of four broad factors.
Cognition One factor (Situation) is external to
Gullible the actor, while the other three
action factors (Cognition, Personality and
Personality State) are internal to the person.

State
SITUATION

“Situation.” It encompasses the problem posed to the actor, and all of the
environmental elements–including the attractiveness and complexity of the
scheme, the personality and persuasiveness of the schemer, and the role of
other people—which contribute to influencing the victim.
Situation is a major force in every gullibility episode of fraudulent schemes,
COGNITION

The second element in the model, Cognition, refers to one’s ability to

understand the scheme and evaluate it.
People who are financially knowledgeable or good at spotting implausible
claims or signs of dissembling, are better able to resist getting sucked into
a risky activity, especially when they are morally questionable
In the Jones case most of the victims were elderly.
It is well-understood that a common adaptation in people with cognitive
decline is to go along with whatever others suggest or are doing.
PERSONALITY

The third element in the model, Personality, refers to behavioral

dispositions—such as impulsivity, interpersonal trust and overconfidence—
that can push one into a gullible act.
one of the few major personality theorists to study gullible behavior,
referred to gullibility as “naïve trust,” by which he meant to trust that is
not tempered with cognitive awareness of the risks in a particular
situation.
STATE

The fourth element in the model, State, refers to aspects of one’s

biological self-regulatory system which (as with emotions such as fear) can
motivate one to behave foolishly or which (as with physical depletions such
as exhaustion or intoxication) can reduce one’s ability to show good
judgment or to reflect on one’s actions.
THANK YOU