When Smart People Do Dumb Things

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On a scale of 1-10, how good are you at spotting when others are trying to scam you?

If you rated yourself higher than a five, you’d better stay with me for this entire post. It’s a story of some very smart people—people who should have known better—who were fooled for a very long time and lost millions of dollars in the process.

I’m switching sides for at least one episode because I’ve recently become fascinated by how con artists work. I first became interested when I was preparing for my podcast on instant trust, and I read a book called The Confidence Game, by Maria Konnikova, At about the same time, my son recommended that I read Bad Blood: Secrets and Lies in a Silicon Valley Startup, by John Carreyrou. Both books are stark reminders that persuasive communication can be used for evil as well as for good, and it’s helpful to know how people pull off cons that seem unbelievable in retrospect.

Let’s start with Bad Blood. In a nutshell, the story is this: a company named Theranos started by an attractive and charismatic 19-year-old Stanford dropout sets out in 2003 to make a huge dent in the universe of healthcare by developing a revolutionary technology that makes it possible to perform hundreds of blood tests using a single drop of blood.  It’s a powerful promise, and it attracts investors from professors, seasoned tech entrepreneurs, and the likes of former Secretary of State George Shultz, retired General James Mattis, Henry Kissinger, Rupert Murdoch, and also signs contracts worth hundreds of millions of dollars with Walgreens and Safeway. The company raked in over $700 million in capital and was valued at one time at $9 billion, making its founder Elizabeth Holmes the youngest self-made billionaire in history.

Holmes may have initially had sincere aspirations to deliver on her dream, but somewhere along the way it turned into a big, bad, elaborate deception. It finally got exposed and began crashing down in 2015, when Carreyrou wrote about it in the Wall Street Journal.

How did a company fool so many sophisticated people for so long? If people with such smarts and experience can be so easily fooled for so long, what hope is there for us ordinary mortals? Actually, as I will talk about, being smart is not necessarily a defense. In fact, being of above average intelligence may actually be a liability.

I believe any elaborate deception requires active participation by both sides in the transaction. This is no way implies that there is anywhere near moral equivalence between someone who deliberately sets out to deceive and their victims, but the thoughts and behaviors of the victims are certainly contributing factors. Let’s look at both sides and see how Elizabeth Holmes was able to pull it off for so long:

• She was extremely charismatic. very intense way of looking at someone; spoke with great sincerity and conviction
• She looked the part. She fit the story she was telling, and people had heard the story before: the gifted passionate dropout who transformed an entire industry, a la Bill Gates and especially Steve Jobs. In fact, she encouraged the similarity by dressing only in black turtlenecks.
• She was totally ruthless with the truth. Could easily look someone in the eyes and tell the most outlandish lies.
• She showed no empathy or conscience. She was willing to do anything to protect her version of the story, from hiring lawyers to intimidate and harass those who expressed doubts to even putting patients at risk.

Even smart people fall into common mental traps

Even the most analytical and careful thinkers take shortcuts or bend to certain biases, and here are just a few of the factors that Holmes exploited.

Social proof. Even smart people don’t have time to research the biochemistry of blood analysis, so they take a shortcut by relying on the words and actins of people they trust.

Halo effect. When someone exhibits positive outward qualities, such as looking and sounding professional and competent, it’s much easier to think they’re good at other things as well, such as being a good manager or scientist.

Confirmation bias. Once you build an attractive story in your mind, it’s almost guaranteed that you will ignore evidence that does not fit that narrative, or you will find convenient explanations.

Fear of Missing Out. If you’re Walgreen’s and you don’t take the plunge, what happens if CVS does and makes millions?

Highly intelligent people may be more vulnerable

Anyone can fall into the mental traps listed above, but highly intelligent people also have two additional handicaps, which may make them even more vulnerable.

Ricky Jay, a professional magician, says, “For me, the ideal audience would be Novel Prize winners…their egos tell them they can’t be fooled.”

But one Nobel prize winner, Richard Feynman, said, “The first principle is not to fool yourself. And you’re the easiest person to fool.” And keep in mind that he was speaking to the 1974 graduating class of CalTech when he said that.

What makes smart people so easy to fool? First, it goes to what Ricky Jay said. They know they’re smart, so they think they can’t be fooled. They don’t actually imagine that the person sitting across from them is smarter than they are (at least in this particular situation). That means that they won’t even listen when someone tells them they’re wrong. George Shultz’s own grandson was one of the first to blow the whistle on what they were doing, and Shultz sided with Holmes. He actually told his own grandson, “I don’t think you’re dumb, but I do think you’re wrong.”

Second, smart people are very clever at coming up with rational explanations for things that don’t look right. No peer reviewed journals? That’s because it prevents others stealing their advanced ideas. Negative press? That’s caused by competitors trying to stop them. Missed deliveries? That’s because of the earthquake in Japan. Those types of explanations are easier to think of than the simple fact that they may just be wrong.

So, what can you do about it?

• Konnikova says the key to resisting persuasion is to have “a strong, unshakeable, even, sense of self. Know who you are no matter what, and hold on to that no matter what.”
• Be objective. There’s a simple hack to help you distance yourself emotionally from the decision. Pretend that someone you know came up to you and asked your advice on whether to invest or not.
• Have an exit script. If you start losing money it can be tempting to throw more in to salvage it. Know what your limits are before you enter into the transaction and stick to it.
• Be very suspicious of secrecy and time pressure.
• Search for disconfirming information; actively search for evidence that you may be wrong.

OK, now that I’ve armed you with the tools, go ahead and listen to the rest of the podcast and see if you pass the test at the end!