Why Being a Sucker Seems So Right

The State of Washington recently brought an action to shut Pigeon King down as an illegal security or business opportunity fraud. Elements of this fraud, which are crystal clear, pervade other frauds -such as franchise fraud.This is Part II of a five part series on the Ponzi scheme, Pigeon King International.

In Part 1 we talked about the difficulty of detecting whether monies returned from an investment were a return of capital or a return from a real economic activity.

Anyone can provide a "pretend" investment of say 10% a month on a hundred dollars, by simply returning $10 to each month for 10 months, until the money runs out.

We are bad at naive induction, figuring out how long the returns have to be paid before we have evidence of real economic activity.

But there is another important psychological reason why ponzi schemes, such as Arlan Galbraith's pigeon breeding scheme, work.

Remember what words Arlan used, to the reporter in the video, to describe Pigeon King International?

"I am convinced that we can save the family farm with pigeons."

With those 11 little words, Arlan weaves incredible magic. And soon magical thinking about pigeon breeding becomes justified.

Over the last nine or ten years, I have interviewed close to 400 or 500 individuals who lost money in either a franchise, a business opportunity or some other money making scheme.

Every one of them knew at their gut level that something was wrong with the scheme, but they all found a way of ignoring their instinct.

One characteristic sticks out in their reasonings.

Even reasonable and experience people engage in this pattern of reasoning - in which all warning signs, typically gut feelings, but not always, are ignored in favor of a nice sounding story that has no empirical backing.

Something like there not being a real end-market for Arlan's pigeons.

Let me give you a short example. One person whom I interviewed,  "knew" all the warning signs. Their due diligence was impressive. But she went ahead anyways and lost an amount greater than six figures.

She could absolutely not afford to lose that money.

Why did this happen, in spite of her due diligence?

Because every objection she discovered about the scheme, she turned into an attack on her own ability to do hard, long and boring work!

The purchase of the business opportunity was not thought of as simply an earnings opportunity, it presented itself as a solution to a difficult family or personal problem.

Such as saving the family farm.

The desire to solve a difficult family or personal problem made her more willing to believe what she needed to believe in so that the family or personal problem could be solved.

For this reason, rational due diligence was next to impossible, despite massive red flag warning signs. The gut feeling of danger had to be ignored or there would be no chance to save the family farm, as it were.

Due diligence fails because the farmers do not properly articulate even to themselves:

a) Why they want this opportunity;

b) What evidence there is for the opportunity satisfying a) and;

c) What other alternatives might satisfy a).

The next time your brain wants to override your gut, look a little deeper at the problem you are really trying to solve.

Tomorrow, we will look at the Arlan's use of testimonials and shills who promote Pigeon King.