Who gets duped? The impact of education on fraud detection in an investment task

Abstract

Many financial scandals appear to depend on a lack of skepticism on the part of their victims. Sophisticated investors trusted Bernie Madoff, for example, despite early warning signs of implausible returns. Our study investigates how education explains fraud detection in financial decision-making. In a simple survey, economics and finance students are asked to make an investment recommendation from among four hypothetical funds, including one based on Madoff’s fund. We use Truth Default Theory to explain our results. We show that education increases the likelihood that students are suspicious of Madoff’s fund, and that for students whose suspicions are aroused, education makes them less likely to choose the Madoff fund.