HOW DO CONMEN GET RICH?
Tricks and scams that make people part with their money
A woman buys a £100 ring from a jeweller, and just as she is about to leave the shop she pauses and returns to the counter.
| Woman: | I’m not happy with this ring. Can I exchange it for that £200 one there? |
| Jeweller: | Certainly, madam (handing it over to her.) That will be another £100, please. |
| Woman: | Excuse me, but I don’t owe you anything. I handed over £100 just now, and on top of that I’ve just handed you a ring worth £100. That’s £200 altogether. |
And with that she storms out of the shop clutching the £200 ring, leaving the jeweller to ponder where he went wrong.
It’s easy to sympathise with the confused jeweller. You need quick wits to avoid being conned. No wonder when exposed to more sophisticated scams, so many people are taken in.
Predicting the sex of your baby
Take the following (fictitious) advertisement, for example:
BABY-SEXING (THE NON-INTRUSIVE, TOUCH METHOD)
Do you want to know the sex of your baby, but don’t like the thought of having sound waves pumped into your womb? We have a completely non-intrusive method that will determine the sex of your baby using only human touch. The price is just £100. In the event of our getting it wrong, you not only get all your money back, but also an additional £50 in compensation. Phone Jackie on…
Sounds like a reasonable offer. After all, there aren’t many services that promise a full refund and compensation if they get it wrong. Why can’t more services be as straightforward and honest as this one?
But, if you buy into this deal, then you’ve been had. It turns out that the only skill Jackie needs in order to offer this service is the ability to toss a coin. Heads is a boy, tails is a girl. Before she visits you, she tosses a coin to decide on the sex of the baby. She goes through her hand-sensing ritual, declares, ‘It’s a boy’ and then pockets your £100. About half the time, of course, she is right, and keeps the money. The other half of the time she is wrong, so she has to pay you £150. Well no: actually, it’s only £50, because the other £100 was yours in the first place.
So if Jackie performs her baby-sexing service 100 times, then on average:
• she will make £100 fifty times (total income £5,000)
• she will lose £50 fifty times (total loss £2,500)
In other words, with 100 customers she can expect to make a profit of about £2,500, which works out at £25 a go. Just for tossing a coin!
This scam, similar to many that have been perpetrated, is probably illegal on the grounds of obtaining property by deception. Is it harmful? Yes, in that it is preying on vulnerable people, and conning them out of £100 that they could more usefully have spent on baby clothes. Worse still, they may use the information to buy clothes for the wrong child.
Like many cons, it is founded on an initial offer that sounds too good to refuse.
How to show somebody that full is empty and empty is full
It is often said that an optimist describes this glass as half full, and a pessimist says it is half empty. Of course we know that they are the same, thing. And, if two things are equal, we can put them in an equation:
Half full = Half empty
Now abbreviate this into letters:
1⁄2 F= 1⁄2 E
With an equation, if you double one side, you need to double the other.
2x(1⁄2 F) = 2x(1⁄2 E)
Cancelling out we get:
F=E
In other words Full = Empty.
George Tindle was in the middle of his morning routine of deleting junk emails when he noticed one that grabbed his attention. It was headed AMAZING FA CUP PREDICTION. Curiosity aroused, he clicked on it to find out more. He found this message:
Dear Football Fan
We know you will be sceptical, but we have devised a remarkably accurate method of predicting the results of football matches. This afternoon, Coventry City play Sheffield United in the third round of the FA Cup. Our system forecasts that Coventry City will win. We advise you not to bet on this, but you might be interested to note the result this afternoon.
Yours truly,
The Cup Predictors
George gave a little smile, but didn’t give it any further thought until later that day when he tuned in to watch the results, as he always did. Coventry won their game. ‘Probably the favourites in any case,’ he thought.
Three weeks later, another email arrived in the box.
Dear Football Fan
Do you recall that we accurately predicted the victory of Coventry City in the last round of the FA Cup? Today, Coventry plays Middlesbrough. Our prediction is that it is Middlesbrough who will go through to the fifth round. We strongly advise you not to bet, but please follow our results to see if they are correct.
Yours truly,
The Cup Predictors
George was a little curious, and awaited the results that afternoon with just a bit more interest. Result – a 1-1 draw. See – it had all been a fluke.
But the following Tuesday, Middlesbrough won the replay 2-0. The Cup Predictor email followed days later. This time it forecast an upset in the fifth round, Tranmere Rovers would defeat Middlesbrough. And they did. And so to the quarterfinals, when Tranmere were forecast to lose to Tottenham. Correct again. That was four out of four.
‘We know this is an unusual system,’ said the next email, ‘but maybe you are now more convinced that we are on to something. In the semifinal, Arsenal will beat Ipswich Town.‘ George couldn’t believe it. He’d already told lots of his friends, and together they followed the live commentary that afternoon. Despite going behind, Arsenal went on to win 2-1. This was incredible.
The next day, another email arrived.
Dear Football Fan
You have witnessed the results of our amazing football predictor system. Are you convinced? We have made five correct predictions out of five, which you will agree defies normal chance, especially since the team that won was not always the favourite. As a special deal, we are offering you a chance to subscribe to a trial month with our match forecasting service for just £200. You email us the two teams and we send you the prediction.
We look forward to receiving your order.
Sincerely Yours,
The Cup Predictors
‘Two hundred pounds is a bit steep,’ thought George, ‘but, then again, if I know who’s going to win I’ll be able to make that money back from the bookmaker a thousand times over.’
He got out his credit card. And he had swallowed, hook, line and sinker.
But where was the con? Unlike the baby predictor, here we had five correct predictions. Surely there had to be something in it. To see how the con worked, let’s look at some of the other customers who received emails from the Cup Predictors.
In an office down the road, Jim received an email on the first morning of the scam, just like George. But while George’s email said ‘We predict that Coventry will beat Sheffield United’, Jim’s email was curiously different. It said ‘We predict that Sheffield will beat Coventry’. When Sheffield lost, Jim didn’t receive any more emails. Ten miles away, Debbie was given Coventry as her first prediction and her second prediction. When they lost to Middlesbrough in Round 4, her emails stopped, too.
In fact, the scam was deceptively simple. To start with, 8,000 emails were sent out to people known to have some sort of interest in football. A match was chosen at random, and half the recipients were told Coventry would win, the other half Sheffield United. Of course, 4,000 would be ‘right’, while the other half would delete the email and think no more about it.
In the next round, 2,000 got the prediction of Coventry, and 2,000 Middlesbrough. After the result of this, 2,000 would be certain to have received two correct predictions out of two. Of course, the Cup Predictors continued sending emails only to the winners, so that, by the time of the final, 250 people had received five correct predictions. And those 250 people felt very special. (Wouldn’t you ?) So special that 50 of them handed over the £200. This gave a nice profit to the organisers, who had done nothing at all but send out emails.
Scams like this depend on our natural inclination to think we are special, so that when lucky things happen to us there must be a reason. Out of every 32 people receiving predictions, only one of those is guaranteed to get all five correct. The other 31 will receive an incorrect prediction, at which point the messages stop. It just so happens that on this occasion it is George who is the lucky one, and so of course he feels special. But remember, like the National Lottery jackpot, it had to happen to somebody.
Like the baby con, this football story is fictitious, but illegal scams similar to this one have been operated many times. You can imagine that this kind of thing is particularly successful in the pseudo-scientific world of the stock market, where a dodgy adviser might advise half his prospective customers that a certain share will go up, and the other half down.
Three men in a restaurant are presented with a bill for £25. They give the waiter £30, in £10 notes, and he returns with £5 in loose change. The men take £3, and leave £2 as a tip.
The men have now each paid out £9, making £27 in total. The waiter has a £2 tip. £27 + £2 = £29. But the men gave the waiter £30, so £1 is missing. Who is conning whom?
(See the end of the chapter.)
The pyramid problem
One of the most successful and harmful scams of all comes under the general heading of ‘pyramid selling’. Unlike the earlier schemes in this chapter, pyramid selling does genuinely offer the public the chance to make money – but only if they can rope other people in to be the losers. And, in some forms and in many countries, pyramid schemes are still legal.
One famous example of pyramid selling was the discredited scheme ‘Women Empowering Women’, which still exists in some places. This scheme pulled on a powerful emotional heartstring. It claimed that most moneymaking schemes are run for and by men. Here at last was a chance for the sisterhood to make money for itself. No men would be involved. The idea struck a chord with women who felt that men had been exploiting them for far too long. Little did they realise that they were going to be exploited by women instead.
The system was extremely simple. To join cost £3,000, though this £3,000 wasn’t described as a cost, it was an ‘investment’. The joiner got to put her name on a heart chart. She would then be able to recruit other ‘hearts’ to join under hers, each of whom had to ‘invest’ £3,000 in her. As soon as there were eight hearts under her name, she left the scheme, having received the £3,000 from each of her eight supporters, making £24,000 in total. Since she had paid £3,000 to join the scheme, she had made a net profit of £21,000.
And the great thing for many women is that it worked: £3,000 had turned into £24,000.
However, it is mathematically impossible for this scheme to work for everybody. After all, nothing is being produced. All that is happening is that some women were transferring £3,000 to other women. For every person gaining £21,000, there had to be seven who were losing £3,000.
In theory, in an infinite population, a pyramid scheme like this could go on for ever. Imagine if you have just bought into it. With enough skill of persuasion, you could certainly find eight people, maybe friends, who were prepared to part with £3,000. You could reassure them with the fact that it has worked for you and everyone above you in the pyramid, so it can work for them, too. So long as the scheme is in its early days, you are likely to succeed.
But, perhaps without realising it, your claim that ‘it worked for me so it will work for you’ is a lie. The population is not infinite. Eventually -maybe when a thousand are in the scheme, or maybe when there are a million – the number of people able or prepared to join will begin to dry up. Either they will already be members, or they will not be willing to part with £3,000. At that point, the whole scheme will fold. And, when the scheme folds, anything up to seven-eighths, or 87.5 per cent, of the people who entered the scheme will discover that they have spent £3,000 that they will never see again.
It’s a bit like a game of pass the parcel, except in this version everyone left holding the parcel when the music stops is a loser.
Pyramid schemes all work in a similar way to this. They don’t have a product, all they offer to do is make you money, which will come from recruiting other people. And the idea is so powerful, it can even bring down a whole economy.
How pyramid selling nearly ruined Albania
In 1996, the country of Albania was brought to its knees by a pyramid scheme. The country was emerging from communism, and most people were living in poverty. The people were therefore particularly vulnerable to a scheme that offered to make them rich quickly. The fact that the scheme seemed to be supported by the country’s major banks and its government just fuelled the enthusiasm even more.
In the case of Albania, what was being offered was a fantastic interest rate on money invested. Everybody sees special interestrate offers from banks from time to time, but what should have aroused the suspicion of investors was that the schemes were offering far higher interest rates to investors than banks were charging for lending money. This couldn’t be right. Think about any loan or mortgage that you take out. The interest you pay is going to be higher than the interest rate on the money you keep in the building society. That’s how moneylenders make their money.
So how were the Albanian pyramid lenders able to offer such high returns? They did it by using the money deposited with them by lenders to pay the interest.
To explain why this was bound to end in ruin, let’s set up a scheme that is a simplified version of what happened in Albania. We’ll call the scheme ‘Sphinx Investments’. Here’s the deal.
Sphinx are asking you to invest £100 in their amazing new scheme. In return, they will pay you 25 per cent interest every year. In other words, you can cream off £25 each year as long as you leave your £100 invested. What this means is that in four years you will have doubled your money. Fantastic, especially when compared with a building society, where £100 deposit might only earn you £5 a year.
What you don’t know is that, when Sphinx start this scheme, they have absolutely no money in the bank. They are going to be using your money to pay your interest. And, for a while, they can do this – as long as their generous interest rate brings in a steady flow of new investors.
Attracted by the prospect of earning 25 per cent in interest, in the first year 1,000 people decide to join the Sphinx scheme and pay in their £100. So by year end, Sphinx have £100,000 in their account. They do have to pay out interest, though, of £25,000. But Sphinx can pay themselves a nice commission of 10 per cent and still end the year with £65,000 in their bank account:
The next year another 1,000 join and invest their £100,000. At the end of the year, Sphinx have to pay 25 per cent to all their investors (this year’s and last year’s), so the interest payments have gone up to £50,000. But Sphinx still end up with £105,000 cash in the bank, which is well up on last year.
So Sphinx seem to be making money out of offering good interest, and the customers are certainly making good money. Those who invested in the first year have already received £50 in interest on their £100 investment, and, not surprisingly, they are telling their friends all about it.
But, as with all pyramid schemes, these short-term gains are building to a disaster. If 1,000 people keep joining each year, this is what happens. The critical column to keep an eye on is the one on the right:
At the end of Year 4, the amount being paid in interest and commission (£110,000) is more than the amount of money being deposited by new customers (£100,000). As a result, Sphinx’s bank balance begins to drop for the first time. By Year 6, cash reserves have plunged to just £15,000 and, the next year, Sphinx are in debt – so they can no longer pay interest. But this isn’t the worst of it. As soon as they get a hint of financial problems, the investors all decide that now is a good time to take out their £100 deposit. To their horror, they discover that Sphinx have no assets, and so their £100 is gone for ever.
As with all pyramid schemes, a minority – those who were in at the start and who spread the word about this ‘wonderful scheme’ – have made a profit. In fact those who entered at the start of Year 1 have made £150 interest at the end of Year 6, so they still made 50 per cent gain even if they lost their deposit. But the vast majority have lost money.
Sphinx’s problems were caused by bad cash flow, that is, running out of money with which to pay customers. They could have improved things if the number of new customers per year had grown. But, as with ‘Women Empowering Women’, customer numbers cannot grow for ever. They are only delaying the inevitable.
What happened with Sphinx is much the same as what happened in Albania, though the Albanian scheme was made worse because the government was duped into promoting the scheme and preyed on the poor, who could not afford to lose their money. In its final days, the scheme was able to keep attracting new investors only by increasing the interest rates to ludicrous amounts, which made the final crash even more rapid and disastrous. The damage to the economy was huge, and its impact is still being felt today.
All bubbles burst eventually
Pyramid schemes are self-created bubbles, which continue to inflate until the money runs out or investors lose their nerve. Because they are built on nothing but promises, they cannot make money for anyone except for the people who set them up and the early investors.
Bubbles like this aren’t always the result of fraudulent schemes. The dotcom explosion and various booms in the property market have been caused, at least in part, by a mass of people jumping on to a bandwagon because they saw a few people get rich quickly. After a while, people buy purely on the assumption that they will be able to flog what they have to somebody else for even more. It has to stop somewhere.
But as these schemes all demonstrate, by the time a ‘good earner’ becomes well known, it’s probably already too late to make easy money. And like gambling, the books have to add up. If some people win, it’s only because others lose just as much.
The restaurant con
Remember the three customers in the restaurant earlier? Well, it is the authors who are conning any reader who believes £1 really is missing. All that is being presented here is some misleading accounting.
At the end of the transaction, the men have paid £27, of which £25 was for the meal and £2 for the tip. £27 -£2 = £25, which balances perfectly.
Another way to look at it is that the men paid £30, of which £25 went to the meal, £3 returned as change, and £2 went on the tip.
The sum £27 + £2 = £29 is a complete red herring, but because it is so close to £30 it is easy to believe the two numbers are related.