Ben Carlson: How Not to Get Scammed

Episode Summary

Executive Summary: Morningstar’s Jeff Ptak and Christine Benz interview Ben Carlson about his book on financial scams and the psychology behind them. Carlson argues that scams persist because of human nature, overconfidence, greed, fear, and storytelling, affecting both novices and wealthy professionals. The episode links fraud prevention to disciplined investing, realistic expectations, and understanding enough, risk, and behavior.

Main Topics: Ben Carlson’s role at Ritholtz and writing process: Carlson explains his work with nonprofits and institutional clients, his investment committee role, and how blogging helps him clarify ideas and communicate with clients and prospects. How investment committees set long-term policy: The discussion covers rebalancing, asset allocation, expectation-setting, and making only infrequent strategic shifts on a multi-year horizon. Why financial scams recur across history: Carlson frames scams as recurring patterns driven by human biases, with the same basic fraud structures appearing from the 1400s to today. Who is vulnerable to scams: The guests discuss how both wealthy and less wealthy people can be targeted, and how modest financial education can sometimes increase overconfidence rather than protection. Behavioral lessons for investors: The conversation emphasizes homework, skepticism, outside review, understanding what you own, and avoiding outsourced blind trust, especially when returns sound too good to be true. Fear, greed, and bull markets as scam enablers: Carlson explains that bull markets, low yields, and anxiety about missing out or running short in retirement make investors more susceptible to predatory pitches. What the research on scams reveals about human psychology: The book’s historical examples show competitive instincts, status-seeking, and the appeal of charismatic storytellers; Carlson notes that scammers often resemble successful entrepreneurs in their persuasive ability.

Key Arguments: Scams are not just about bad actors; they exploit universal human tendencies like overconfidence, status competition, greed, and fear. Wealth and education do not immunize people from fraud; sometimes they make victims more attractive targets or more overconfident. Investors should know what they own, why they own it, and how a portfolio fits their goals rather than outsourcing understanding entirely. Good financial decisions are mainly behavioral: avoid the big mistakes, don’t chase home runs, and define 'enough' to reduce lifestyle creep. Bull markets and low-rate environments increase fraud risk because investors reach for higher returns and become more willing to suspend skepticism. Many scams mimic real innovation and productive enterprise, which is why bubbles and fraud often overlap historically. A healthy financial process requires updating expectations based on current conditions rather than relying on static forecasts or certainty. Even highly capable people can be duped, and studying mistakes—rather than just successes—offers better protection against future errors.

Data Points: Book title: Don't Fall For It: A Short History of Financial Scams - Ben Carlson’s newly published book discussed on the podcast. Madoff scheme size: $65 billion - Carlson cites Stephen Greenspan as a victim of Bernie Madoff’s Ponzi scheme. Ponzi-era returns promised by Charles Ponzi: 40% to 90% in 60 to 90 days - Used as an example of a clearly implausible pitch compared with contemporaneous 5% interest rates. Current 10-year Treasury yield referenced: 1.8% to 1.9% - Carlson uses this as a benchmark for judging suspicious return promises. Baby boomers retiring: 10,000 per day - Carlson says this cohort will be a major target for scams due to their assets and need for retirement income. British railway investment at peak: Roughly half of GDP - Historical example of a rail bubble that produced both losses and lasting infrastructure benefits. British rail density after bubble: About 7x Germany or France - Carlson notes Britain ended up with far denser rail infrastructure after the mania. Johnny Depp earnings cited: Three quarters of a billion dollars - Used as an example of self-inflicted financial destruction through overspending. Madoff returns pattern: Never had a down quarter; only one or two down months - Illustrates how steady returns can still conceal fraud. High promised returns in Keith Wright case: 20% to 25% annually; 10% per month in one account - Example of fraudulent pitch to doctors, lawyers, dentists, and business people.

Pivotal Quotes: "The majority of the people these days, I think, are especially a little gun shy from the last crisis." — Ben Carlson: Explaining why investors may still be anxious and vulnerable even in a strong market. "You know, if this guy is really making 90% every 90 days, why wouldn't he put his own money in it?" — Ben Carlson: Pointing out a basic due-diligence question that can expose a scam. "Your money, no one is ever going to care about it as much as you are." — Ben Carlson: His warning against fully outsourcing understanding to an advisor or intermediary.

Implications: Listeners should treat skepticism, humility, and process as core defenses. The episode suggests fraud risk rises when markets are euphoric, returns seem easy, or certainty is packaged as expertise. Behavior—not brilliance—is the main safeguard.