The Wiles of a Con Man, by Victor Niederhoffer

October 26, 2009 |

I have recently been exposed to the wiles of many a con man. I wonder what revisiting the subject of the techniques of the big con could teach us about the current situation in the markets. I think of such things as leaving the victims fearful of claiming restitution at the end, and the imprimatur of the respected elder at the beginning. What is missing to the layman is the degree of complicity of the victim. What do you think?

Scott Brooks responds :

High level cons: Con men seem to prey on issues that the Victim has, at least, a peripheral knowledge of or experience in. This allows a con to speak to the Victim and use words and situations that the Victim can relate too.

The key to this is it allows the Con to mix in just enough truth to get the Victim to agree with the con on some points, thus showing that Victim that the Con knows what he is talking about, as well as add an air of expertise to the Con's resume. The "truth" that Con mixes in are the "white swans" that the Mark so desperately wants to see.

This is a Con's ultimate fantasy, because the Mark will then do most of the work to build up the Con's resume in his own mind as the Mark see's a world swirling in white swans and purposefully ignores the black swans.

The con shows some small and perfectly plausible area/idea that has not yet been exploited (the exploitation point or EP). If the Con can build up Mark's confidence in him by supporting the exploitation point with some sort of 3rd party reliable material, then the Mark will further build up the Con's "Cred's" in his own mind. Even if the 3rd party material is only tangentially related, it will be viewed as more white swans by the Mark.

The Con will then play up the profit potential of the EP and get the Mark very excited. When he plays it up, he has to be careful not play it up too much……..his figures have to be appealing, but can not sound, "too good to be true". If the Con is smart, he will then "play down" the profit potential that he just built up to show that he's not some "pie in the sky"over seller and that he has a reasonable outlook on the profit potential….i.e. "Now, I know those numbers are exciting, but let's look at the downside….." He then shows what appears to be a reasonable low end profit potential.

The Con will then spring the trap…..and spring it with a sense of urgency.The con will usually request a reasonable amount of money that the Mark won't have any trouble accessing and can quickly write a check for….BUT…..the money will be needed within a short period of time…usually right there on the spot. If the Mark balks, the Con will back off and let the Mark tell him when he can have the money available. Lets say the Mark says that he can get the money to the Con on Wednesday. The Con will usually make a reasonable request and say, "I can only hold out until Tuesday. So can I get it on Tuesday instead of Wednesday"

The Con will then usually say something like, "Okay, great, let's do it on Tuesday. Now the banks don't post any deposits after noon for that day, so I need to make deposit before noon on Tuesday.Can I come by at 10 am on Tuesday?" The Con will then usually treat the Mark to lunch to pick his brain about the Mark's idea's about how to move this forward and solicit any advice the Mark can give, based on his extensive knowledge of (whatever the Mark has extensive knowledge of) and how it might apply to the EP (which the Mark has a peripheral knowledge of). More meetings will be scheduled to go over "details" between now and the day the check is to be picked up so the Mark will feel involved and and excited about the opportunity. At these meetings, the Con will play to Mark's ego and let the Mark brag to the Con that he has lots of money…and the Con will then drop very subtle hints that more money may be needed in the future. By now, the Mark feels very good about the Con and feels that they are closely bonded due to this "insider secret" that they both share. The Mark will want to enhance this feeling of closeness as it is the "white swan" in their relationship and allows the Mark to ignore the "black swans" that he needs to be seeking that are sometimes screaming but often whispering,"you're being conned". When the Con picks up the check on Tuesday morning, he arrives a little early, gets the check and has a refresher "rah, rah" meeting with the Mark and gets the Mark even more excited…..the Con will usually have some"extra" good news about the EP that has just come to his attention and it will likely involve some sort of 3rd party expert saying something that is related (usually in a very tangential manner) to the EP that the Con displaying the Mark on.

The Con will then return as many times as he can to get more and more money from the Mark, always playing to the emotions of the Mark. Even if the Mark begins to have doubts, he'll not want to waste all the money he's put into the EP so the Con will be able to get money from the Mark even after the doubts begin (the mind of the Mark says "I know I'm $200k into this thing,so investing another $20k is not that big of a deal if we can pull this off.Heck all good things take time and are little harder than we initially expect"). This goes on until the Con can't get anymore. There are many more steps and an infinite number of variations on the"Con/Mark" relationship. But many of those relationships contain most of the factors that I've listed above.

Bill Rafter comments :

Bill Rafter If one were to tell “others” (i.e. not in our immediate circle of market watchers) that the market was pulling a con on us, they would think us more than a little paranoid. However if the market is the digested knowledge (and emotions) of its collected population, then thinking of it as sentient is not too absurd. Once we have accepted that, however, it’s a fine line between what comes after and paranoia. What is the first concern of a sentient being? Self-preservation. Now for a market to keep itself alive, it can never allow any one participant to gain such an advantage that the participant wins all the money. Should the latter happen, the market would be destroyed. Thus the market’s future existence depends on its not letting anyone get an insurmountable advantage. Consequently, there can never be a “Holy Grail” or flawless indicator. Perfection in trading can only be defined in statistical rather than absolute terms. Once you realize that you find it easier to live with your mistakes.

Dr. Rafter is President of Mathematical Investment Decisions, a quantitative research consultancy

Alston Mabry comments :

In considering the elements of a con one is inevitably drawn to the rich genre of American Movies, which for the most part have glorified the con man. David Mamet gets a lot out of the con. See:

1 House of Games

2 Homicide

3 Heist

4 The Spanish Prisoner

5 Spartan

6 Redbelt