Education isn't automatic protection against fraud | David Moon

David Moon
·2 min read

Weidong Xu, a Harvard University teacher several years ago, was also a researcher at the Dana-Faber Cancer Institute. Xu was raising investment capital to fund work on a SARS treatment, ultimately collecting $600,000 from friends and family.

Except rather than use the money for research, the well-connected and well-educated Xu sent the entire amount to a group in Nigeria promising that he was about to be the beneficiary of a $50 million windfall. That is, as soon as he funded some minor and routine expenses related to his good fortune – $600,000 worth of expenses.

Highly educated people can convince themselves that they are too smart to be tricked by a scamster, thus creating a vulnerability that a resourceful swindler can exploit.
Highly educated people can convince themselves that they are too smart to be tricked by a scamster, thus creating a vulnerability that a resourceful swindler can exploit.

That’s right. A teacher at Harvard not only fell victim to the Nigerian email scam, but he also managed the unique accomplishment of simultaneously both perpetrating and being victim to a fraud.

Surprisingly, high intellect, when combined with an exaggerated ego, is associated with a higher-than-average susceptibility to be defrauded. These often highly educated people can convince themselves that they are too smart to be tricked by a scamster, thus creating a vulnerability that a resourceful swindler can exploit.

Less well-educated people also provide fertile targets for crooks. Have you ever wondered why the obvious email scams that manage to avoid your spam filter are almost always poorly written and full of grammatical errors and misused words? Because, despite Weidong Xu’s example, most well-read people are unlikely to wire money to a bank in Lagos in hopes of receiving a few million dollars from a grateful king. By littering their initial emails with poor grammar, the criminals weed out people who would likely sense a scam once they begin to communicate one on one with the Secretary General of Nigeria.

Enterprise fraudsters rely on a person’s emotions overruling his logic to perpetuate their theft. They prey on both greed and fear, deftly adding fuel to those destructive emotions. Fraudsters also create a false sense of urgency. If someone offers you an incredible investment opportunity, but you have to make a decision immediately, decide “no.”

Despite the high-profile nature of fraudsters such as Bernie Madoff and alleged thief Sam Bankman-Fried, I suspect that more money is inappropriately taken from investors a little a time, over years, by excessive (and usually legal) fees and expenses. These “death-by-a-thousand-cuts” losses are more likely to happen to well-educated people who wrongly assume they are too smart to be victimized, then end up being sold inappropriate mutual fund share classes, annuities in their tax-deferred accounts and a host of non-traded structured investment products that combine high fees, opaque market valuations and illiquidity to virtually guarantee years of hidden, exorbitant fees.

The next time you are tempted by something that sounds a tad too good to be true, remember Weidong Xu.

David Moon, president of Moon Capital Management, may be reached at david@mooncap.com.

This article originally appeared on Knoxville News Sentinel: David Moon: Education isn't automatic protection against fraud