Social Cognition and How to Spot a Fraudster

Social Cognition and How to Spot a Fraudster process.st/social-cognition August 16, 2019

In experiment after experiment, the real-world human decision-making process falls outside of rational economic theory. Indeed, many of the decisions we make are completely irrational.

Don’t take my word for it.

Dr. Dan Ariely‘s book Predictably Irrational explores our irrationality and motivations in great detail. If you don’t want to read the book then I highly recommend checking out his Ted Talk: Simply put, our instinctive brain often seems to take control at the pivotal moment of choice. If you could understand why and how this happens, you can better predict your customers’ behavior and give them the value that they’re looking for.

This is where social cognition and behavioral psychology come into play. It’s an area that the marketing team here at Process Street is spending a great deal of time studying so that we can better serve our customer.

Social cognition is the study of how our minds interpret people and the world around us. This article will give you a primer into some of the core concepts and go over real-world examples to help solidify these principles.

1/10

You’ll learn how to have a better understanding of how people interpret your messages (marketing, personal, etc…) and be able to apply these concepts to all areas of your life.

You’ll be able to communicate to your audience effectively and accurately.

“I am like a machine being driven to excessive rotations: the bearings are incandescing and, in a minute, melted metal will begin to drip and everything will turn to nothing. Quick: get cold water, logic. I am pouring it over myself by the bucketload but the logic sizzles on the hot bearings and dissipates elusive white steam into the air.” – Yevgeny Zamyatin This quote reflects the internal conflict that we each go through. George Loewenstein calls this the dilemma of Sovereignty.

If you want to skip to a specific section of this article just click on one of the section links below:

What is social cognition?

Source There are multiple definitions of what social cognition is. Here are a few that are particularly helpful:

2/10

“Social cognition is a sub-topic of various branches of psychology that focuses on how people process, store, and apply information about other people and social situations. It focuses on the role that cognitive processes play in social interactions” – Wikipedia “Social cognition is the study of mental processes involved in perceiving, attending to, remembering, thinking about, and making sense of the people in our social world” – Dr. Gordon Moskowitz, According the child’s frequency of vocalisation increases. Therefore, There are far more complex descriptions of social cognition which run the risk of alienating anyone who’s not a high-brow academic. That said, should this be left to the scholars who sit in dimly lit rooms, smoking pipes while they pontificate?

Of course not.

In fact, the description I just gave about scholars played on cognitive psychological factors such as bias, framing, and anchoring. These are all part of social cognition and will be addressed further down in this article, so stick with me.

3/10

Source A good example to help better understand what social cognition is would be to think back to when you were getting ready for a job interview. Before you met the interviewer you spent time picking out your best outfit, trying to figure out what you were going to say, and (hopefully) combed your hair.

During this process, you’re worried about the first impression you would be giving to the hiring manager. You also probably spent time worrying about how to interpret the signals/messages that the hiring manager gave off.

Examining that is social cognition.

Social cognition looks at how we form that first impression and what meaning we associate with the other person’s behavior.

Psychological priming A very important term is called ‘priming’.

We’ve all heard or have used the phrase, “they were primed for that”. This is talking about something (an action, message, etc.) which was created specifically to nudge us towards a certain outcome.

“Priming is a technique in which the introduction of one stimulus influences how people respond to a subsequent stimulus. Priming works by activating an association or representation in memory just before another stimulus or task is introduced. This phenomenon occurs without our conscious awareness, yet it can have a major impact on numerous aspects of our everyday lives.” – Kendra Cherry, How Priming Affects the Psychology of Memory David Ogilvy once said, “It’s not creative unless it sells”. This statement can be applied to the concept of priming – is it occurring if it doesn’t impact the behavior of an individual?

Either way, that’s what priming is supposed to do.

With that cleared up, let’s jump into subliminal priming and how it is being used in the marketing world.

The prime In one instance of unintentional priming, Starbucks received millions of dollars’ worth of free product placement exposure. This was due to a white coffee cup being accidentally included in a scene of Game of Thrones. The cup inclusion was a mistake on the editing teams’ part.

4/10

Many companies don’t have the luxury of profitable mistakes, and pay large amounts to associate their product with movie stars or celebrities. They sometimes do this by subtly having their product used or incorporated into the background of a movie.

The idea is that our unconscious mind will notice the brand and after repeated exposure will build positive sentiment. This positive sentiment will turn into a purchase by keeping the brand top of mind for the consumer.

Source This is exactly what Samsung wanted to happen during the 2014 Oscars. The company reportedly paid over 20 million dollars for special inclusion and sponsorship of the evening.

Some of the items they purchased were the utilization of Samsung devices throughout the evening and inclusion in live video. The Samsung logo was shown numerous times throughout the night and eventually, a “selfie” with multiple celebrities was taken.

The purpose was to demonstrate the quality of the camera on the phone while also garnering what seemed like celebrity endorsements. This selfie and other sponsorship linked marketing was portrayed to the viewer as being organic in the hopes of influencing a purchase decision. “… among the most influential ideas linking perception and affect comes from the discovery that exposure to a stimulus leads to an enhanced liking for it. The literature on category accessibility showed the peculiar effect of awareness on unconscious thought and social judgment – the influence of the priming event is most visible when that event is least available to conscious recollection.” – Marilynn Brewer, Social Cognition 5/10

Simply put, the more someone is exposed to a brand, the more likely they are to create a positive association. This concept explains why car dealerships have their ads running on local tv and radio in what seems like a non-stop 24/7 loop. Although some might be annoying, I bet you thought of an ad as soon as I mentioned car dealerships.

Efficacy of prime The Samsung prime helped to reshape the public sentiment of the brand. Through this event and many other celebrity sponsored endorsements, the brand started to be perceived as fresh, young, and millennial. Which is necessary to gain market share from Apple devices. The selfie also became one of the most shared images on social media, which helped to build brand awareness. The brand strategically utilized subliminal mere exposure (SME). “[SME is] the enhanced liking for stimuli following repeated subliminal exposures to those stimuli as a form of visual priming. In other words, preferences for an item (an object) can be formed after repeated exposure to the same subliminal prime. Interestingly, the SME effect is actually significantly stronger than the mere exposure effect for stimuli that are consciously perceived.” – Dr. Mohamed Elgendi – Subliminal Priming — State of the Art and Future Perspectives However, some of the value gained from the selfie was diminished when Ellen DeGeneres tweeted the next day using an iPhone. The impact of using a Samsung could have been reinforced if the brand worked with Ellen for at least a month longer.

This effect is also sometimes called the familiarity principle in social psychology but, no matter what you call it, there’s no doubt that it works. After all, most of us would be more likely to choose a familiar product than one we haven’t heard of before.

Biases/Heuristics In this section, we are going to look at psychological biases and heuristics. One way to think about the concept of ‘bias’ is as a personal mental shortcut that we create when going through the decision-making process. This is typically looked at as an error in thinking.

A heuristic is also a mental shortcut but these are typically focused on solving problems.

Another way to frame this is as a rule-of-thumb strategy. There are multiple types of heuristics and biases. Due to the scope of the subject, we are going to limit our discussion to a few real-world examples. I have also included a helpful video on heuristics below.

The Bernie Madoff scandal Most of us know the story of Bernie Madoff. If not, here is a short recap.

6/10

For almost 20 years Bernie Madoff was able to convince regulators and investors that he ran a legitimate investment company. He even became the chairman of the Nasdaq in the early 1990s. It was eventually found out that he was running the largest Ponzi Scheme in history and defrauded thousands of investors out of billions.

I thought it would be interesting to dig into some of the biases and heuristics that he employed to commit these crimes. This is also a good way to get a real-life example of social cognitive principles at work.

Source When reviewing the decision-making process of investors in Bernie Madoff’s investment group, it can be determined that the ‘representative’ and ‘affect heuristic‘ played significant roles.

The affect heuristic utilizes current emotions to influence decision making. This is primarily an instinctive mental shortcut. While the representative heuristic can most aptly be summarized as a mental shortcut that utilizes a mindset of stereotypes.

7/10

“Madoff managed to fly under the radar for so long (despite multiple reports to the SEC about suspicions of a Ponzi scheme) because Madoff was a well-versed and active member of the financial industry. He started his own market maker firm in 1960 and helped launch the Nasdaq stock market. He sat on the board of the National Association of Securities Dealers and advised the Securities and Exchange Commission on trading securities. It was easy to believe this 70-year-old industry veteran knew exactly what he was doing.” – Stephanie Yang, 5 Years Ago Bernie Madoff Was Sentenced to 150 Years In Prison – Here’s How His Scheme Worked To both amateur and professional investors, Madoff showed every potential trust signal.

Massive corporations, celebrities, and influential individuals were all trusting him with their money. He represented the epitome of what a successful money manager should be.

Goulston from the Huffington Post also supports this statement when he discusses the social proof heuristic. He contributed that people will often follow others, in this case meaning that they invested when they saw others they thought were smart do the same.

Individuals also like to believe people that are like themselves. This brings about the in/outgroup mentality. Madoff played on the trust aspect of this affect heuristic when he recruited his initial customer base.

“Madoff’s impact on the Jewish community was devastating. His earliest clients were from social connections he made through a Jewish summer camp where his family vacationed in upstate New York. The Palm Beach Country Club, which was founded by a group of Jewish men in the 1950s in response to their exclusion from the other country clubs in Palm Beach, was an epicenter of Madoff victims. His list of victims includes numerous prominent Jewish individuals and charities. This is just one example where people develop trust in someone because they think they have shared values or experiences, and their trust turns out to be misplaced.” – Patrick Carney, 10 Years Later: Lessons Learned from the Bernie Madoff Scandal

8/10

Source

Strategy to overcome a fraudster Daniel Kahneman states that the affect heuristic simplifies our lives by building a world that appears tidier than it is. Many investors gave into their system one thinking and only saw positives by investing with Madoff. They didn’t spend the necessary time to truly weigh the benefits and costs involved. Much of the information provided by Madoff to normal investors was overly complicated and not easily understandable.

Carney said that Madoff “… told his clients he was engaging in a split-strike conversion strategy, which involves selling out-of-the-money call options on index futures, buying a representative sample of the underlying equities in the index, and purchasing in-the-money put options”. Instead of taking the time to try and understand what this investment strategy meant many investors blindly trusted Madoff.

Before moving forward with any investment or life decision an individual should think slowly and methodically, taking care to understand all the variables. It might even be useful to set up a prioritization matrix.

9/10

An investment strategy guides the success or failure of your money. Taking some time to understand it and determine if it is viable by getting third party critiques could have saved investors millions. This is also directly applicable to the decisions we encounter every day.

The next time you’re in a store shopping for something and the salesperson glamours you with a lot of industry jargon, don’t just use a mental shortcut. Take the time to analyze the factors.

Final takeaways The power of social cognition and its related concepts (priming, heuristics, biases, etc…) can be used in both positive and negative ways. In fact, let’s have some fun with what can otherwise be a pretty dense topic.

Try to put on the hat of a behavioral psychologist for a minute. The following 15-minute exercise will give you more insight into yourself and can be applied towards understanding your customers in a deeper way. This can directly help you engage with your customers better.

After all, when you understand the “why” behind your customer’s actions then you are in a better place to serve them.

Spend 5 minutes and choose one or two biases you currently have Spend another 5 minutes thinking about where that bias came from Use your last 5 minutes to reflect on the decisions you made because of that bias This exercise is meant to remind us that it is important to take time for self-reflection and review our internal reference points. Interactions from the past that have shaped certain biases may no longer be relevant.

10/10