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October 4, 2004
"I have heard that if a lender makes a
mistake in servicing your loan, he must forgive the entire remaining balance. Is
that true?"
Not a chance! If it were true there wouldn�t
be any lenders left.
This is an illustration of what I call the
"good fairy syndrome", which seems to be quite widespread in our society. It is
a belief, centered in the gut rather than the mind, that somewhere out there is
a good fairy who will solve all our financial (and other) problems.
Con men and scamsters understand the power of
the good fairy syndrome. They realize that some people will buy into any claim,
no matter how absurd or contrary to common sense, if it awakens their latent
belief in the good fairy.
I see the good fairy syndrome lurking in many
of the questions I get from readers, and in the advertising spam that provokes
these questions. How else, except from a gut belief in a good fairy, can one
explain why a borrower would pay $3500 to someone they don�t know and never
heard of, who claims that they can arrange to have their mortgage paid off? I
could fill the remainder of this column with other illustrations.
The good fairy does not limit her beneficence
to the mortgage market. A day doesn�t pass that I�m not offered three more
inches... At least weekly, a letter comes in from Nigeria offering to transfer
large sums to my bank account, with me getting to keep multiple millions. The
good fairy is an accomplice to every con game that works.
One of the reasons I dislike lotteries is
that they strengthen the good fairy syndrome. Lotteries are a bad gamble because
the prize is almost always less than the amount wagered, but since someone
always wins, lotteries legitimize the good fairy. This has to strengthen the
impulse to rely on her in other areas where no one wins but con artists.
There are no data on trends in the incidence
of fraud, so it is not possible to verify that the growth of lotteries in the US
has encouraged fraud by stimulating reliance on the good fairy. However, a
survey of consumer fraud by the Federal Trade Commission this year indicated how
pervasive the problem is. The survey indicated that "�nearly 25 million adults
in the US � 11.2% of the adult population � were victims of one or more of the
consumer frauds covered by the survey during the previous year. More than 35
million incidents of these various frauds occurred during the year."
The FTC survey, furthermore, only covered
types of fraud that are relatively easy to define, such as "Purchased credit
card insurance" or "Billed for internet services you did not agree to purchase."
Losses on these types of frauds often don�t amount to much. Mortgage frauds and
medical frauds were not covered, probably because they are more difficult to
define. Yet both are widespread and the losses associated with them are often
very large indeed.
Another indicator of how widespread is belief
in the good fairy is the pervasive unwillingness of consumers to pay for
information. Most people prefer to have their financial advisors (mortgage
brokers, financial planners, security brokers, etc) get paid by the providers of
financial services that the advisors select for them, rather than paying the
advisors themselves. This prejudices the validity of the information, of course,
and this costs consumers dearly. But it allows them to pretend to themselves
that the advisors are good fairies.
"As a high school teacher, what brief lessons
about finance should I give my students?"
I was tempted to give you a list of
substantive lessons, such as how interest rates and credit scores are
determined. This kind of information, however, if not used, is soon forgotten.
Besides, it isn�t ignorance that leads to bad financial decisions, its "knowing"
what isn�t true.
Here is my list of the three most important
principles you can teach your students:
1. There is no such thing as a good fairy.
It is this belief, rather than
ignorance of financial matters, that makes people gullible and vulnerable to
fraud.
2. Don�t respond to solicitations.
This is a direct corollary of principle 1, since those who solicit are never
good fairies. While not all those who solicit are rogues, all rogues solicit,
which means the odds are against you when you respond.
3. Don�t be afraid to pay for information.
This is another corollary of principle 1; since those who have the information
you need are not good fairies, you should expect to pay a fair price for it.
Copyright Jack Guttentag 2004
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