Chartists Economists & Gurus – Part Two

A second extract from Financial Speculation

This time a couple easy (but fraudulent) prediction scams!

One quite well known prediction scam, and nowadays totally illegal, is recounted in John Allen Paulos’s excellent book Innumeracy. There are a number of versions of the idea, with Paulos illustrating the idea with stock index prediction. The following version is similar, but with a slightly stronger marketing message as the punter is shown supposed predictive genius across a number of stocks, rather than just a single index.

The would-be expert starts a stock-market commentary business and sends out free predictions to an initial group of say one thousand investors. The commentary tells one half that Stock A will rise in the next month, and the other half that it will fall. After a month the ‘losing’ five hundred are dropped from the mail shot, and the process is repeated to the group that received last months’ correct prediction. Now one half (two hundred and fifty potential punters) are told Stock B will go up and the other half that it will fall. After a few rounds of predictions you can demonstrate to a core number of potential subscribers that you have a 100% percent record, across a number of totally different stocks and stretching out over a number of months! In fact the initial mail shot could be to say ten thousand recipients, after six months, and six correct market calls in a row you would have around one hundred and fifty souls who think you can see every stock-market turn! Of course once subscribers pay up you are faced with trying to predict as successfully (likely to be impossible) or making a run for South America.

Another similar idea, and equally fraudulent, is to set up a service predicting the sex of unborn children. Simply place an advertisement in the national press advertising your service, asking for a fee and (this is the rather unpleasant part of the idea) a small urine sample. In your marketing and advertising blurb you stress that the methods used are ground-breaking, and of course guaranteed. (Everyone loves a ‘guarantee’ and rarely stops to question its value.) If for some inexplicable reason the system fails to predict the sex of the unborn child correctly the customer gets their money back. As all marketing men know, the two most powerful phrases in any business are New and Free. So you have a new product, and whilst it’s not free, it does have a money back guarantee if the service fails to make a correct prediction. So how do you make this work? Easy – Just tell every customer that the child will be a boy – around 50% of your ‘predictions’ will be correct! The twist here is of course is that you are only predicting a known outcome, but the marketing and packaging make it look like you are offering a genuine service.