Who Gets Duped? The Impact of Economics and Finance Education on Skepticism in an Investment Task

Abstract

Many financial scandals appear to depend on a lack of skepticism on the part of their victims. For example, sophisticated investors trusted Bernie Madoff, despite early warning signs of implausible returns. Our study investigates how education and personality explain skeptical behavior in financial decision making. In a simple survey, economics and finance students are asked to make an investment recommendation from among four different hypothetical funds, including one based on Madoff’s fund. We find that perceptions of the suspiciousness and ethicality of the Madoff fund affect a participant’s recommendation. In turn, these perceptions are affected by education and personality, with more education leading to higher suspicions.