Monday, March 19, 2012

Too Good To Be True

"Fraud and falsehood only dread examination. Truth invites it."

- Samuel Johnson

A few days ago I was reading an article about fraud on the Balance Junkie blog.  The article discussed a number of different points, but the idea that struck me was the advice to rely on common sense.  I totally agree that a lot of fraud would be eliminated if people would just remember that if something sounds too good to be true, then it's probably a scam.

But as I thought about it for a while, it occurred to me that perhaps financial common sense is not so easy as I was first thinking.  Here's the problem: in order to know whether something is financially "too good to be true", you must first have some reference point as to what is reasonable and unreasonable.  And that, I'm afraid, is severely lacking in our society.

Sure, there are some totally unrealistic scenarios out there and the people who are fooled by them are either not thinking or they are just secretly hoping against all odds that they somehow stumbled onto free money.  But in many cases, people do not even realize something is too good to be true.

Bernie Madoff was able to bilk many people for a long period of time with a scheme that was too good to be true.  Interestingly, he didn't promise that he could double your money every month or something spectacular.  Instead, he simply claimed he could crank out 10% returns every year in any environment.

The sad fact is that the average person does not recognize that scenario as too good to be true.  Even among finance professionals, many cannot tell you why that is too good to be true, although certainly most of them have been taught that it is.  A shaky foundation of the facts, however, will often yield to a distorted claim of reality.  The world needs much more education about basic financial concepts.

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