Ralph Raines, Jr., was the heir to a large tree farm in Gaston, Oregon—a family fortune valued at $15.5 million. In 2004, when he was fifty-seven, the confirmed bachelor decided to visit a fortune-teller in nearby Bend, Rachel Lee of Lee’s Psychic Shop. He liked what he heard—so much so that for the next two years, he made regular visits to Lee’s storefront for further consultations. He felt he could trust this woman. She had suffered a great deal in her life—she’d lost a husband to cancer—and she seemed honest and earnest. When Raines’s father suffered a stroke, in October 2006, he had the perfect idea: he would hire Lee as his full-time health worker. She had, after all, taken care of her husband for years. Lee started work at almost $9,000 a month. Her boyfriend, Blancey, was hired to fix up the property. By the time Raines Senior died, his son had given Lee power of attorney. Lee started buying real estate—psychic shops in several towns, a house. It would be, she told Raines, a perfect way to “realize investment gains.” She had previously worked in real estate, she told him. He trusted her advice implicitly.
And then, in 2007, she upped the stakes: she introduced Raines to her teenage daughter, Porsha. Except, to Raines, she was Mary Marks, a complete stranger. For the role, she donned a blond wig—his preferred hair color—affected a British accent, and arranged a chance encounter.
Raines remembers it well. October 21, 2007. He had been at a tree farm convention and had asked Lee to pick him up from the airport. She’d told him to meet her in the smoking area. And there, on one of the chairs, was a striking blond who addressed him by name. She sometimes got vibes from people, she explained, and she was getting a strong psychic reading from him. Personal facts, even his birth date: the information just seemed to flow from her psychic channels. Raines was completely smitten. He asked her name. Mary Marks, she said, a part-time bookkeeper. They made plans to meet for coffee.
Their friendship soon deepened. In time, Marks-née-Lee confided a secret. She was illegal, and would soon be deported. Raines agreed to marry her, and she proceeded to provide him with legal papers to sign—all fake, it would turn out. By November 2010, Raines’s house had been transferred into Marks’s name.
And then came the kicker. Marks wanted a child. Would Raines agree to in vitro fertilization? He would. He remembers her bringing him a large pot with dried ice inside and instructing him to place his “donation” inside. As far as Raines was concerned, she would give the sperm to a California clinic for the procedure. Marks, in the meantime, had other plans. She really was pregnant—by another man. When the boy was born—she named him Giorgio Armani—she insisted he was Raines’s son. Rachel Lee would serve as his nanny.
In 2012, Marks asked for a second donation. Raines happily obliged. He was proud of his growing family and eager to welcome a new arrival. This time, though, Marks faked her pregnancy, wearing padding to simulate the baby bump around the time it was expected to show. And then she called with the devastating news. Gloria Jean—Raines had already picked out a name—was no more. She had had a miscarriage. Raines was devastated.
But why the fake second child? Rachel Lee needed just a bit more time. By the time of the “miscarriage,” she had concluded the liquidation of Raines’s property, draining the once prosperous farm of all resources.
On February 19, 2015, the sixty-seven-year-old Raines took the stand. He appeared baffled and distraught, not quite comprehending what had happened. “I thought I was married to a person named Mary Marks. I don’t know where she’s at,” he told the court. And he wasn’t quite ready to believe what people were telling him. “For reasons of my own, I’m just going to wear the ring.” Lee was sentenced to eight years and four months in prison. Her daughter, Porsha, the twenty-five-year-old Raines had known as Mary Marks, pleaded guilty to co-conspiracy. Her sentence: two years and ten months. Blancey Lee would serve two years.
It wasn’t at the trial alone that Raines acted as if he were in denial. In the decade that he had become enmeshed with the Lees, he had heard warnings of disaster. At a local event that he attended with Rachel Lee, several friends voiced their skepticism. And when he attended his high school reunion with Mary in 2010, his cousin Karin Fenimore expressed shock. She had no idea he was married. Before, she later told prosecutors, he had been in the habit of stopping by her house every week or two for a friendly chat. But the interactions had gradually decreased. She felt he was being isolated from his support network, and that couldn’t have been good. There were, as well, the more concrete signs. His child, for one, looked nothing like him. Raines chose to ignore it all. He could have gotten out, but things seemed to be going so well. And so he did what was easier: kept right on believing. It wasn’t until bank officials expressed concern about some of the financial transactions being conducted in his name that the police became involved. Had it been up to Raines, he might have kept believing until the end. It would have been a simpler, happier reality. And that basic desire for a happier, simpler reality is at the center of the convincer’s success.
As information from our environment comes in, we home in on the positive and tend to isolate and filter out the negative. That selective perception makes us more empathetic, happier, better able to care for others, more productive, and more creative. When we receive negative feedback, we can (usually) deal with it, because, we rationalize, it’s not really our fault. We are good at what we do; it’s just that, this time, things went a bit awry. And even if we don’t rationalize, it’s easier to take the bad when you think yourself capable. Yes, I messed up, but I’ll be able to make it work.
But that selective filter also makes us far more likely to attribute Miller’s 10 percent returns not to something strange, but rather to our own acumen in choosing investments. Since it is the result of our good judgment, it will continue indefinitely rather than come to an end the moment the environment changes. If we’re expecting something to work, we will see evidence for its working even in ambiguous circumstances. Are Miller’s returns the result of astonishingly savvy investments—or are they coming from somewhere else? If the money is coming in as promised, we don’t dig too deeply into why; we just assume he’s a brilliant investor. Isn’t that why we invested with him?
Take the stock market. We have reams and reams of data on its performance over time—charts, trends, cycles of boom and bust, expected returns, and the like. But when things are going well, it’s tough to convince even the savviest of investors that they may soon enough turn south. When, during the 1998 bull market, investors were asked to predict their annual return for the following year, they guessed an equally bullish 14 percent. Over the next ten years, they grew even more optimistic, estimating 17.4 percent average annual returns—even though the long-term base for U.S. stocks is between 10 and 11 percent, a fact of which, presumably, traders and investment professionals are well aware.
It’s one of the reasons that, time and again, bubbles will swell—in the markets on the whole, or in certain sectors—and then, just as fabulously, burst. Everyone realizes, in theory, that the downturn will happen. In practice, though, it never seems to be quite the moment for it. After all, things are going so well. The convincer is precisely that: wholly convincing. Why quit while you’re ahead, if you are certain you’ll remain ahead in the future?
The ebullient optimism that doesn’t see its own demise isn’t a function of modern markets, either; it’s far older and more pervasive than that. One of the most famous bubbles in history was the great Dutch tulip mania—tulpenwoede—of the early seventeenth century. So desired were the flowers, and so high their price, that in the 1630s a sailor was jailed for mistaking one for an onion and eating it. While the story is likely apocryphal, the sentiment is not. At the bubble’s peak in 1637, some bulbs had increased in price twentyfold in a three-month period. Semper Augustus, considered particularly desirable, cost about a thousand guilders in the 1620s. In the weeks before the crash, it sold for the cost of a luxury house in Amsterdam: 5,500 guilders. In February, the market crashed. Such is th
e nature of speculation. And such is the nature of our endless optimism. If we’re not expecting it, it won’t happen, and if we are, it will. The convincer needs no further evidence than the momentary success it seems to provide.
Though few people would think of bubbles as confidence schemes, the line between bubble and con can be a very fine one: they operate on many of the same principles, occur for many of the same reasons, and are so incredibly persistent, despite past evidence, based on much the same rationale. And sometimes it can be incredibly difficult to tell the one from the other. One man’s bubble may well be another man’s con.
In 1714, John Law arrived in Paris. Tall and elegant, with a passion reserved in equal parts for women and gambling, Law soon installed himself at Place Louis-le-Grand—a glamorous square in the heart of the 1st arrondissement that boasted the highest echelons of society as residents. Today, it’s better known as the Place Vendôme, home of the Ritz-Carlton and the Hotel de Vendôme. Soon after his arrival, Law received an appointment at the Bank of Amsterdam. He had been a noted economist back in Scotland, trained by his banker father, and had a way of making himself liked in the highest of places.
In due course, Law was gambling alongside the likes of the Duke of Orleans, France’s future regent. The duke took to the colorful Scotsman. Here was a man, he thought, who knew how to be serious with the best of them, but didn’t take himself too seriously. He had hobnobbed with the most learned minds of Europe, from Amsterdam to Venice, but he knew how to be the perfect guest and most charming conversant.
At the time, France was mired in debt. Louis XIV had racked up some two billion livres, in the currency of the time, to pay for his wars and his whims. Precious metal was scarce, and new coins hard to come by. When the king died, leaving a five-year-old heir, the duke assumed the regency. Overwhelmed by the nation’s financial quagmire, the duke asked his old financial wizard of a friend for advice.
Law soon assumed control of the Banque Générale, and was shortly thereafter appointed controller-general of the country. He had a plan. For years, he’d been advocating a system of central banking, in which paper currency, backed by a reserve of gold and silver, would serve as the medium of exchange, thus making the financial system more elastic. Today, that seems like business as usual; it’s how we operate, at least in theory. Back then, it was quite revolutionary. There was no paper money in circulation. Everything was transacted in precious metal. Paper, though, would increase the monetary supply and, Law hoped, stimulate trade and commerce, getting France out of its slump. Law established a trading company, the Mississippi Company, that would engage in exchange with the colonies. People could buy shares and raise money, the company would trade for important goods and precious metals, and the economy would get a much-needed stimulus.
What happened next has been debated ever since. One thing is certain: the shares in the Mississippi Company collapsed in 1720, after rising to an all-time high the year prior. A few discerning investors saw that more and more shares were being issued, and more and more money printed, with little to show for it: it was a system feeding on itself. And so some—notably two prominent princes—decided to cash out. Others soon followed suit: shares were worth a great deal, so why not collect the hard cash now? Quickly, Law printed some 1.5 million livres to cover the conversions—but soon people wanted coin, not paper bills. The Banque Royale, as it was subsequently called, collapsed under the demand. Law himself was forced to flee the country, dressed as a beggar to avoid capture. He died in Vienna eight years later, of pneumonia, poor and friendless.
Some people see John Law as a master con man, someone who brought France to the verge of financial collapse by selling worthless stock in a sham trading company. As one rhyme of the time goes:
My shares which on Monday I bought
Were worth millions on Tuesday, I thought.
So on Wednesday I chose my abode;
In my carriage on Thursday I rode;
To the ballroom on Friday I went;
To the workhouse next day I was sent.
Or as one nobleman put it, “Thus ends the system of paper money, which has enriched a thousand beggars and impoverished a hundred thousand men.” As late as 1976, when Jay Robert Nash published his history of the con, Hustlers and Con Men, he listed Law among the game’s most polished practitioners. In October 2014, John Steel Gordon, a prominent business and financial historian, called Law’s the greatest scam of all time.
But today many would argue that Law was no confidence artist. He had a theoretically sound scheme, but got caught up in the bubble mentality. He thought he could continue to issue and print indefinitely as he consolidated his trading companies and set the whole thing in motion. Confidence would remain high because it was high already, and the share price would continue to rise because, well, it had never fallen in the past.
So was he a hustler, or merely unlucky? Ultimately, we’ll never know: it is, for the most part, a question of knowledge and intent. Did you seriously want to help the economy, or did you weasel your way into a position you had no business being in with the knowledge that you could get rich, and flee when the going was good? The jury is out. Before his stint in France, back in his homeland, Scotland, Law had run his father’s banking firm into the ground in pursuit of an extravagant gambling habit, and was later sentenced to death for his role in a love duel. (He escaped to Amsterdam, and later returned to Scotland.) By the time he made his way to the French court, his proposals had already been rejected by Scotland and Amsterdam. France looked an awful lot like the ideal con victim: the nation was mired in debt and close to bankruptcy. It would try anything. And for a while, Law did seem to be making headway. Those who were poor now prospered. Those who had clamored for revolution were now satisfied. Who’s to say the good times couldn’t keep coming? The convincer is all about getting your mark to dedicate himself to his commitment for the long haul, and, willful con artist or not, Law certainly knew how to play the part well. There is a thin line between a reformer ahead of his time and a savvy con artist who knows how to exploit optimism about the future. Up until the last moment, France and its people kept piling more and more resources into the scheme. How could it burst when it had all gone so smoothly?
It’s simply how our minds so often work. We cannot fathom failure in light of success. Well, we can fathom it. We just don’t really think it’s going to happen—not yet, not now, not to us. Our optimism in the future runs ever-strong.
So strong, in fact, that we often create the illusion of successful outcomes ourselves, even without the sorts of cash incentives a Miller or a Law or a Madoff offers. We see a con going well, and read our desires into ambiguous signs, to convince ourselves that we’ve invested wisely, be it money, time, reputation, or any other precious resources. When we want to, we see signs of good fortune everywhere. It’s one of the reasons for the famous hot-hand fallacy that Cornell University psychologist Thomas Gilovich identified in 1985. Gilovich had first observed the phenomenon among basketball aficionados when they pronounced players on a “hot streak” or playing with a “hot hand.” The players and coaches, too, seemed to believe it—even going so far as to select certain draft picks because they were perceived to be playing hot at the time.
To Gilovich, the whole thing seemed highly unlikely. He was a cognitive psychologist, studying rationality and its departures, and there was simply no reason to assume that people’s talent and skills could show such tremendous, lasting deviations. He’d also been working with Amos Tversky, who, along with Daniel Kahneman, had identified the “belief in the law of small numbers” some ten years prior: that we believe that chance rates seen over the long term should also be reflected in the short term, and if they are not, something else must be going on. For instance, since a coin is supposed to land on heads half the time, we expect it to do so if we toss it, say, ten times. We don’t take into consideration the fact that averages are derived over a broader timescale. And so, if we see tails coming up time an
d time again, we tend to think that we’re particularly lucky.
Simon Lovell, con artist turned legitimate magician, wrote a book about exploiting such tendencies when you’re out on the grift. One of the simplest short cons revolves around getting people to place bets on outcomes they think either highly unlikely or highly likely because of their recent experience (an experience that, in the convincer, is unerringly positive)—and then to upend those perfectly reasonable-seeming expectations. In what’s called a proposition, or prop, bet, you first make a claim, and then ask for any takers to bet against you. One example: betting that you can tie a cigarette into a knot without tearing the paper. Impossible, right? Anyone would bet against you after trying it a few times on their own. But it’s not actually impossible if you first wrap the cigarette tightly in the cellophane from the box and then tie the cellophane. Prop bets take advantage of what we expect and then do something completely different. They take the psychology behind the convincer and exploit it to its logical conclusion.
Gilovich and his colleagues decided to test our hot-hand-like perceptions by analyzing the shooting records of the Philadelphia 76ers and the Boston Celtics. They failed to find any relationship suggestive of actual hot hands: a player who made one shot was no more likely to make another soon after. Any deviations from their average level of play were the result not of streaks, but of chance: they were to be expected from the probability distributions and were not the result of some magical power that a player suddenly had.
But even though the hot-hand fallacy has been largely disproven—in 2006, a review of twenty years of data found an overwhelming lack of evidence for the presence of sudden bouts of talent—it continues to govern our thoughts of the future. If a player is on a hot streak, we should give him the proverbial ball because he will make the shot. In hedge funds, Kahneman points out, we see the same thing. When a fund has been tremendously successful for a few years, investors pour in: success now, even in something as volatile and chance-like as markets, means success always. Often, though, those phenomenal returns evaporate or reverse. It is, after all, a game of chance. Sure, a manager could be quite good, but ultimately he also has to be quite lucky—and luck can often masquerade as talent when the latter is absent.
The Confidence Game Page 23