Finding financial fraudsters: Quantitative and behavioural finance approaches

Abstract

Financial fraud has been with us since the beginning of recorded history. The motivation of some to gain by bypassing legal and moral codes appears to be hardwired into the human race. This paper underscores that one of the reasons for the repeated success of these schemes is that the rest of us are equally hardwired to trust where we should be sceptical, and to place undue trust in our flawed decision-making processes. This paper presents some tools for analysing whether an investment scheme may be fraudulent. Perhaps more importantly, it points to using the most successful fraud of modern history as an example, the reasons why many do sometimes fall for these schemes. Perhaps the extra vigilance gained from this experience will help to prevent the next Madoff.