Denial of Fraud and Cognitive Dissonance

A Ponzi scheme involves a financial scam in which early investors in a fake investment fund are promised—and often achieve, at first—immense returns on their investments. In reality, the fund’s returns are provided, not by the fund’s actual investment results, but by later investor’s contributions to the fund. (This is also called a pyramid scheme, because the lucky few at the early enrolled top of the pyramid of investors are paid by the many later investors ‘below’ them in the pyramid.) Such schemes can collapse when unforeseen circumstances either cause a shortage of new investors, or investors start pulling their money from the fund, as happened when the financial meltdown of 2008 tripped up the Madoff scam, the largest Ponzi scheme yet revealed. Ponzi schemes are named after Charles Ponzi (pictured, in a 1910 mugshot), whose version of the scheme was the first to become known throughout the United States.

 

The New York Times of Friday, March 12, 2010 ran an article by Floyd Norris, who points out that some financial scheme victims refuse to believe that they have been scammed, even after government authorities have revealed the scheme in all its sordid detail. As Mr. Norris relates, when the U.S. government tried to compensate the victims of the original Ponzi scheme, it ran into a problem with some of the victims:

 

To get the money, the victims had to turn over the notes [i.e., financial certificates] they had received from Ponzi. But many of them refused to do so when the cash was offered in 1931.

 

Those who refused, wrote Donald Dunn …, were “holding onto the belief that Ponzi somehow would yet make good on his promise of 50 percent interest.” …

 

That was probably not the first, and certainly not the last, example of what might be called “buyer’s denial.” It is the belief that somehow a fraud was not what it seemed to be, and that there was still a way to avoid losing the money the victim had foolishly invested.

 

In our day, as Mr. Norris points out, a similar drama is being played out with the victims of another scam. As he describes it, CMKM Diamonds illegally issued bilions of shares of stock that were, in reality, backed up by less than $500 dollars in real assets. Since this stock scam (not a Ponzi scheme) was revealed, a group of victims has banded together to sue for about $4 trillion. However, they are suing officials, not of CMKM, but of the U.S. government, alleging that government agents manipulated CMKM as part of a sting operation that left honest corporate officials and their investors twisting in the wind.

 

The reactions of these CMKM investors and some of the original Ponzi investors are examples, not just of denial, but of cognitive dissonance. Widely known to students of social psychology, cognitive dissonance is a phenomenon in which people are observed to undertake various mental gyrations to reconcile dissonant, ultimately unreconcilable thoughts. For example, a well-to-do person might think that she or he is a good, generous person, and yet refuses to donate money or food to a begging person on the street. How to reconcile the cognitive dissonance? Perceive the beggar as evil, lazy, or otherwise unworthy of help.

 

The scammed investors mentioned in Mr. Norris’ article are faced with a pair of contradictory self-oriented cognitions:

1. “I am a bright, prosperous person who makes good investment decisions.”
2. “I am being told that I’ve been taken in by a scam artist who has robbed me of a ton of money.”

 

Dissonant cognitions indeed! Apparently, for some victims, the response is denial: “I was not scammed at all!” Then, in the 1930s: “Ponzi will deliver.” Today: “It is all really the government’s fault that CMKM failed.” (Indeed, one of the academic experts interviewed for the Norris article describes these cognitive dynamics in terms very much like those of cognitive dissonance.)

 

A cognitive dissonance perspective may help civil officials understand resistant, “in denial” victims of scams. Of course, one research question would be, who do some victims exhibit what Norris calls buyer’s denial, and others do not?

 

Scams like this, on the one hand, are in the domain of microeconomics, investment, finance, and economic forensics. On the other hand, the emergence of cognitive dissonance in the behavior of some scam victims demonstrates a favorite point of mine, discussed in an earlier post: “Everything is Psychology.”

 

Reference

 

Norris, F. (2010, March 12). Dealing with fraud by denial. The New York Times [late edition], pp. B1, B8.

 

Copyright 2010 Mark E. Koltko-Rivera. All Rights Reserved.

 

[The image of Charles Ponzi, above, is in the public domain, and was obtained from Wikipedia.]

"Everything Is Psychology"

Some years ago, I was in a seminar discussion as a student, debating some point with a professor who was visiting our class. I forget the point that I was trying to press, but I shall never forget the professor’s response: with a twinkle in her eye, she said, “But Mark, from that point of view, everything is psychology.”

And so it is.

The environmental crisis? That’s psychology. The attitude that people take towards safeguarding the environment; the attitude that they take towards environmental toxins, waste, and so forth; whether they take a reactive or pro-active stance towards problems and challenges; even whether they separate their trash or not—all of these are psychological issues, and as such are well within the bailiwick of psychology.

The current global financial meltdown? That’s psychology, too. The single-minded focus on profit taken by many mortgage lenders, regardless of any concern about potential consequences; the focus by many borrowers on getting a large home, regardless of the risk; the overall lack of concern with how individual borrower, lender, and investor actions could have enormous societal consequences—all of these are psychological issues.

Natural disasters? That’s psychology, as well, to a large extent. Whether we plan ahead and commit resources to avert potential future disasters; whether we consider ourselves responsible to reach out to those in need—all of this is psychological, too.

Extreme example: how about killer asteroids? Yes, indeed, that’s psychology, too. No, the asteroids are not in our minds. However, what we do about them—whether we are willing to plan for this kind of contingency; the degree of societal resources we are willing to devote to averting a global catastrophe that is unlikely at any given moment, but inevitable in the longest of long runs—that is all psychological.

I am not saying that we live in some kind of dream; I am certainly an advocate of philosophical realism. The physical world (including the interpersonal world) is certainly out there. However, the way that we sense and form perceptions of the physical world; how we interpret it to form the experienced world (which is the ‘real world’ for each of us); and, perhaps most importantly, how we respond to the physical world—all of these are psychological issues. Therefore, all of the issues I have mentioned above have highly significant psychological components.

So What?

My point in making this point explicit is to point out that psychologists have a much greater field of play than they usually claim. If you—the student, the researcher, the scholar, the practitioner—are concerned about some current or potential problem that the world or individuals face, you may wish to consider what the psychological aspects of this problem are. (Even someone’s simply refusing to consider the problem as a problem is a psychological issue.) By researching these problems from a psychological point of view, you may be able to address even seemingly colossal problems. Even killer asteroids.

Of course, what is true of colossal “external problems”—the environmental crisis, killer asteroids—is all the more true of the wide spectrum of social problems that our society faces: prejudice and discrimination, homelessness and poverty, lack of educational and vocational opportunity. These are things that more and more psychologists should be working on.

Maybe even you and I.

Copyright 2010 Mark E. Koltko-Rivera. All Rights Reserved.

[The image was obtained from Wikipedia. The creator of the image released it into the public domain.]

Introducing The Psychological Blog

Welcome to The Psychological Blog. In this introductory post, I explain what this blog is about, who I am, and the rules for posting comments.

What This Blog Is About

In this blog, I will address a wide range of topics about psychology. By “psychology,” I mean several things:

• the subject matter itself (for example, the function of dreaming; things that therapists should watch out for; topics about which I wish people would do research);

• the discipline of psychology (for example, things that psychologists should do to promote the field);

• organized psychology (for example, items having to do with the American Psychological Association [APA], the Association for Psychological Science [APS], the Association of Psychology Postdoctoral and Internship Centers [APPIC], and so forth).

It will be a grab-bag, with items of interest to undergraduate and graduate students, clinicians, scientists, and those involved in the governance of professional associations. I anticipate posting about once or twice a week. I encourage you to become an official “Follower” of this site.

Who I Am

I am Mark E. Koltko-Rivera, Ph.D. As an undergraduate, I majored in psychology at Haverford College, graduating in 1981. My masters degree in counseling was obtained at the Lincoln Center campus, Graduate School of Education, at Fordham University, where I graduated in 1984. My doctoral degree was obtained in 2000 from the counseling psychology doctoral program at the Department of Applied Psychology in the Steinhardt School of Culture, Education, and Human Development, at New York University (an APA-accredited program). My predoctoral internship was completed at the Psychology Unit of the Sunset Terrace Mental Health Center of Lutheran Medical Center.

I am a Fellow of the American Psychological Association. Two award-winning articles of mine include “The Psychology of Worldviews” and an article about Abraham Maslow and self-transcendence.

Rules for Posting Comments

In the Comments to any post, anyone is welcome to disagree vigorously with me. However, profanity is not welcome, and personal attacks—particularly on others who have posted comments—will not be tolerated. I hope that the Comments will be a place for civil and fruitful point-counterpoint discussion.



Copyright 2010 Mark E. Koltko-Rivera. All Rights Reserved.