How scammers exploit investor emotions and instincts

This article launches a two-part Q&A on the psychology of financial fraud, featuring insights from Andy Reed, head of behavioral economics research at Vanguard, and John Ginelli, head of Vanguard Investor Protection. In this first installment, the pair unpack the tactics scammers use to exploit the role emotions play in decision-making and explain why these tactics are so effective.

Reed: One of the fundamental ways we’re wired is that emotions dominate reason. When we’re in a heightened emotional state—whether that’s excitement, fear, or disgust—it narrows our focus and turns down the rational processing part of the brain that thinks clearly about numbers, probabilities, and logic. Scammers often get you so excited about the upside that you’re blinded to the risks and red flags. Emotions don’t always lead to bad decisions, but in the context of fraud, emotional intensity puts blinders on people and may prevent them from thinking clearly and evaluating the situation.

There are two mechanisms in the brain that drive how we make decisions. There’s the fast process, which is emotional, instinctive, and intuitive—your gut feelings. And then there’s the slow process, which is rational and deliberate. It’s where you can do the math. The fast process comes first. So, when you’re engaged by a fraudster, your emotional reaction can dominate the rational reaction.

This past year, I got a threatening email with a picture of my house from the street. The email indicated that they knew where we lived and threatened to visit our home if I didn’t send money. I had an awful pit in my stomach—the scammers got me. And then I read further, calmed down, and recognized that it was a sophisticated scam. They acknowledged that I probably felt upset and said they’d walk me through the next steps. Red flag! But my initial reaction was panic. Why? Because that’s how I’m wired as a human being. Emotion comes before reason. Eventually reason kicked in, and I realized it was a mass-market scam using information scraped from the web. But at first, we believe before we disbelieve. We have to evaluate and ask, “Wait, is this true?” And then overturn our disbelief. By the second, third, and fourth time I got the same scam email, it no longer triggered an emotional reaction, and I was able to brush it off.

Ginelli: Seniors can be more likely to feel lonely, especially if they’ve lost loved ones and have an enhanced need for social connection. Knowing that, fraudsters gear some scams toward building that social connection, making victims feel like they have a friend, or sometimes something more. Also, seniors tend to have more money than younger people, so scammers can benefit more by going after folks of advanced age.

Reed: There are a few generational factors at play here. First, baby boomers have over $85T in wealth, making them a prime target for scammers.¹ There are also generational differences in the acceptability of talking about money. For older generations, at least in the U.S., it’s taboo to talk about money—they consider it a private matter. For younger generations in the U.S., I think that’s changing. There’s also guilt, shame, and embarrassment for older investors who have been victimized. Admitting they’ve been scammed amplifies those negative feelings, so they tend to keep it private—especially since they focus more on regulating emotions and preserving positive feelings.

Ginelli: Guilt and shame often take over, and that’s a real problem. First, because the emotional toll of victimization can be even more profound than the financial harm. And second, because it often leads to cases not being reported, which means we can’t help and law enforcement can’t help. It also limits our ability to see trends.

Sophistication of technology also comes into play, where fraudsters engage with seniors through crossover scams using increasingly complicated digital channels. Fraudsters take advantage of the tendency to respond emotionally, as Andy mentioned, and they also exploit this by using technology to misdirect or confuse victims. People who grew up with technology could be a little less vulnerable to a scam that involves digital manipulation.

Ginelli: We often see the feeling of wanting protection and wanting to be a protector exploited, especially when the scammer is putting the security of the victim or their loved ones at risk. Even if it’s not real, they make the victim think it’s real. For example, with the “grandparents’ scam”, where the fraudster pretends to be a grandchild who needs money quickly because they’re in trouble.

Reed: Older people tend to be more trusting than younger people and more motivated to believe what someone is saying. That said, not all older people are that way, and personality traits are somewhat stable across the life span. If you’re skeptical early in life, you’ll probably be skeptical later in life, and that may help you. That sustained instinct to pause could be your armor against fraudsters.

Ginelli: Another trait is the desire for justice, which scammers exploit in impersonation scams. Here, someone impersonates a member of a fraud department of a major financial institution or a U.S. government agent. They fabricate a story about a bad event that will happen unless the victim helps prevent it. Victims are told they’re helping an organization like the CIA or FBI bring bad people to justice, so it’s a big deal to them—and it often leads to secrecy. They don’t share what’s happening with others. 

Reed: Victims are often least equipped to realize they’ve been caught in fraud. That’s partly because it’s harder to think rationally when you’re making a judgment involving you, not somebody else. Family members, as outsiders, may be able to see the situation without “emotion-tinted” lenses and try to put a stop to it. But as the individual affected by the scam, you’re ramped up emotionally.

My 102-year-old grandfather was targeted by scammers a few years ago. To this day, we still don’t know how much money he lost or how many scams he was victimized by. He kept it secret, and despite our best efforts, we couldn’t figure out all the ways he was communicating with them. We found some emails and phone records, but the scammers’ efforts were very sophisticated. They coached him on how and where to buy a burner phone, instructed him to do money drops, and more. The secrecy made it really difficult to unwind and document everything that happened. So, the scammers used secrecy to get the ball rolling and spread tentacles before our family could intervene and stop the damage. It was one of the most stressful and painful situations my family ever experienced. We were trying to help him, but he was fighting us, because he believed the scammers over his wife, son, and grandson.  

Ginelli: Andy, I’m so sorry you and your family experienced that. Many people think “it won’t happen to me” or that only certain people experience it, and that’s just not the case.

A lot of times, there’s a long game being played. Scammers aren’t just after a quick hit. Once they gain a foothold with someone, they exhaust every possible resource. They’re not only stealing their victim’s assets at the financial institutions—they’re convincing them to take out loans, leverage credit cards, and go into debt. They’ll take everything they can, and the longer they have, the more they’ll take. Checking on loved ones and having regular, robust conversations is a good start to keeping them safe. Be aware of patterns and shifts in behavior. Urgency, secrecy, pressure to move assets, and sharing personally identifiable information are all red flags.

In the next installment of our Q&A, we’ll dig even deeper with Reed and Ginelli, looking at more ways fraudsters operate and what investors can do to protect themselves and those around them. 

Note: This content was edited for length and clarity.