A Psychological Investigation of Consumer Vulnerability to Fraud: Legal and Policy Implications

Article excerpt


Despite the high incidence of consumer fraud in the United States (1) and its dire consequences, especially in the home loan context, (2) very little research has been conducted on the psychological factors that leave consumers vulnerable to fraud and deceptive sales practices. In particular, few have tested different explanations for consumer vulnerability to various types of fraud and to analyze the legal and policy implications in terms of creating better laws to protect consumers. (3) This article focuses on the problem of consumer susceptibility to deception when a consumer notices a problematic term in a contract but is persuaded to proceed with the deal. To convince the consumer to proceed, sales representatives may use a number of techniques, which include providing various types of reassurances and deceptive explanations of the problematic term. Such explanations can be effective even when the proffered explanation makes no sense. (4) As discussed in the legal and policy implications section of this article, the ability of salespeople to deceive consumers in this manner is particularly harmful because these techniques may not be actionable in some jurisdictions. (5)

We hypothesize that when unscrupulous salespeople, including mortgage brokers and lenders, reassure consumers and explain away "problematic" contract terms (i.e., terms inconsistent with what was previously promised and against the consumer's interest), many consumers will acquiesce to the problematic terms. Acquiesance frequently occurs even when the explanation offered does not make sense. For example, Hill and Kozup interviewed victims of predatory loans who discussed how predatory lenders dismissed their concerns by providing after-the-fact rationales and explanations claiming that the terms that were contrary to promises made early in discussions--such as a promise that the loan would accrue interest at 4.5% even though that rate was just for the first year and then would adjust--were legitimate or in the borrowers' best interests. (6)

We conducted two fraud simulation studies to test our hypothesis that consumers are vulnerable to deception through reassurances and explanations even if the proffered explanations do not make sense. In an attempt to determine the factors that make some consumers more vulnerable to fraud through deception, we also conducted a follow-up survey that the participants from Fraud Simulation Study 1 and a replication of Fraud Simulation Study 1 were given, which asked them to self-report the factors that motivated them to read, sign, or object to problematic terms in a contract. Fraud Simulation Study 2 investigated whether demographic and other characteristics of the consumers surveyed affected their vulnerability to fraud.

Section II of this article describes the prevalence of consumer fraud, the most common contract scenarios where it arises, and the findings from our prior studies that investigated consumer fraud which contextualize this paper. Section III discusses five psychological explanations for why consumers might be vulnerable to deception that we then empirically test in the two fraud simulation studies and follow-up survey. Section IV reports the methods and results of Fraud Simulation Study 1 and analyzes those results. Section V describes the results from a follow-up survey given to the participants from Fraud Simulation Study 1 and a replication of Fraud Simulation Study 1. Section VI reports the methods and results of Fraud Simulation Study 2, which was designed to generalize the results of Fraud Simulation Study 1 to realistic consumer fraud situations and to investigate how demographic and other factors affect consumers' vulnerability to fraud. Finally, Section VII analyzes the policy and legal implications from the findings of the two fraud simulation studies and the follow-up survey, including how to modify existing laws or create new rules to better protect consumers in light of our findings. …