Finding Financial Fraudsters: Quantitative and Behavioral Approaches

Quantitative and Behavioral Approaches by Ezra Zask

Post Madoff due diligence has taken on an increased importance, and new techniques have been developed to identify financial frauds.  This article describes several quantitative methods that can be used to identify potential frauds, including Benford's law, performance drivers and strategy replication, and statistical significance tests.  An extensive analysis of the Madoff Ponzi scheme describes the red and green flags that enabled the fraud to remain undetected for 20 years.  Finally, The article explores the role of behavioral heuristics and fallacies that often enable fraudsters to succeed.  These include representativeness, anchoring, overconfidence, loss aversion, regret aversion, confirmation bias and selective perception, as well as an automatic trust mechanism that allows us to live in society may also help fraudsters in their ploys.   Finding Financial Fraudsters