Have I ever mentioned how much I love Lifehacker. It's must reading for me. Last week, I came across an article Seven Persuasion Tactics Repeatedly Used by Scammers. Regular readers know that I often write about MLM and other scams in this space. I feel that keeping your hard-earned money away from scammers is an overlooked part of personal finance.
Thus an article showing the scammers' playbook can prove to be extremely valuable information.
The information that LifeHacker is pointing it is Understanding scam victims: seven principles for systems security (PDF). Yes, the title gives you a clue it is going to be about nerdy computer systems, but in reality it is a quite readable paper on scams themselves.
The paper lists many scams, such as the old 3-card Monte and explains why it works. The really interesting part though, is when they boil the scams to the 7 lessons and principles that form a common thread through them.
Here are all seven and how they apply to MLM (though you can certainly find them in other scams as well):
1. Distraction Principle
The distraction principle is common in any magic act. The idea is to make the mark focus on thing while the trick is being performed. It's common for pickpockets to use this for example.
In the world of MLM, there is distraction all over the place. The MLM company and salespeople focus on telling you about the dream vacations and dream cars that come with the opportunity. They'll even show a few people with big checks walking across a stage. The deception is to get the mark focused on the great prize and ignore the truth that well over 99% of people lose money in MLM.
The paper also noticed that a "sexy swindler", an attractive female, can get the male mark to let down his defenses. It's not a surprise that all the top MLMs put pictures of the successful people on their websites, and generally these people are fairly attractive.
2. Social Compliance Principle
This where someone dressed as a fake police officer can pull of crimes such as a jewelry swap that normal people couldn't get away with. Fake car valets with fluorescent jackets can steal cars. A fake waiter can walk away with your credit card if he times his appearance right.
Perhaps most noticeable is that police officers and military members are extremely susceptible to these scams as they are taught never to question someone of higher rank.
In the world of MLMs, there are "leaders" who are at the top of the pyramid. These people are looked at as experts in MLM, when in reality they were just quick to the game, knew the right person at the right time. In fact, I've caught many of these "top experts in MLM" breaking the law such as claiming that MonaVie juice prevents Swine Flu.
These leaders are often given rank such as "diamonds" or "platinum" which parallels the example with the military rank. The marks are often told to "listen to their upline"... those with higher rank who are making money from the questioning lower people. The marks are also told not to listen to the negativity of everyone else... a famous tactic employed by cults to divide people from their trusted family and friends.
3. Herd Principle
I'll let the paper's wording speak for itself, "Even suspicious marks will let their guard down when everyone next to them appears to share the same risks. Safety in numbers? Not if they’re all conspiring against you."
This is one of the biggest reasons why MLM still exists today. Most of the people involved are part of the herd principle. This often called Groupthink, and is explained here. Essentially everyone in the room thinks that it can't be a scam, because everyone else in the room is not saying it is a scam. The new MLM mark comes in and sees a bunch of people seemingly involved in a real business and falls in line.
4. Dishonesty Principle
Once again, I'll defer to the paper for the explanation, "Anything illegal you do will be used against you by the fraudster, making it harder for you to seek help once you realize you’ve been had."
In terms of MLM, people who have been scammed rarely complain about it. Here are two of the main reasons why:
A. They have friends in the MLM. They don't want to get their friends in trouble.
B. As explained in this principle, they've played a role in the deception. Thus if they report it, they'll could be brought up on charges as well.
5. Deception Principle
This is very similar to the Distraction Principle above, but is more straight-forward. For example a fake cash machine that is used to steal ATM numbers.
The paper itself mentioned the distraction of the attractive female on male marks again as deception, not just distraction.
In the world of MLM, there's deception at every point. They try to claim that your company is a pyramid scheme. This is classic deception where a a legitimate hierarchical organization is falsely compared to an illegal pyramid scheme which is dependent on endless recruiting.
MLM marks are taught that if it were illegal it would have been outlawed by now. That's what the president of one MLM said, until 3 years later his company was shut down by the FTC after consumers lost hundreds of millions of dollars.
6. Need and Greed Principle
Paper's explanation: "Your needs and desires make you vulnerable. Once hustlers know what you really want, they can easily manipulate you."
The paper's research quotes one scammer: "If you want to con someone, all you need to know is what they want, even if it doesn’t exist!"
So this is where the MLMs that are health products come into plan (no they don't work.) MLMs exploit people's need and greed for health, wealth, and the happiness of their friends. The pitch usually involves all three. The products are supposed to bring health. The "business opportunity" is supposed to bring health. Sharing it with friends will bring those to them as well.
It is an amazingly convincing formula. The only thing is that what they want doesn't exist. The products are not proven to be clinically effective by the NIH or FDA standards. The "business opportunity" has been shown in hundreds of companies to cause losses for well over 99% of the participants. The only truth is that this pain is shared with friends, which often kills the friendship.
7. Time Principle
Paper: "When you are under time pressure to make an important choice, you use a different decision strategy. Hustlers steer you towards a strategy involving less reasoning."
MLMs do pitch "get in now on the 'ground floor'." In this case it makes sense, because once there are few dozen in it, there's really not much opportunity left. The organization is saturated with too many salespeople selling "business opportunities" and not enough marks who ignorant enough to fall for it.
However, I've seen this most often used outside of MLM. I've written about how RainSoft promised thousands of dollars of soap if we made a deal right away. Similarly, Marriott time shares have a policy of putting a limited time bribe on the table.
Whenever I see this marketing tactic, my Spidey sense alerts me that I should tread very cautiously.
The Final Word
The conclusion of the paper was most interesting. It cited about a half dozen similar works, but was careful to note how there's very little research on the subject of scams. The limited literature that does exist seems to contribute to these seven principles.
While my intent here was to take it a step further and apply it specifically to MLM, one shouldn't limit the scams to any particular domain. The best defense is to be aware of them and as The Department of Homeland Security says, "If you see something, say something."
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