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How Overcoming Cognitive Bias Could Save South Africans Millions


How Overcoming Cognitive Bias Could Save South Africans Millions

In my last two articles, I’ve been talking about how easy it is for credit fraudsters to hide in plain sight while craftily stealing data they can then use to steal our identities and our money.

In this, the last of the series, I’ll explore why this happens, what schemes to look out for, and what you can do to protect yourself.

Let me start by asking you a question: Have you ever heard of the Dunning-Kruger effect?

A bit like the Duckworth-Lewis system in cricket, this effect was named after the people who first came up with it – social psychology researchers David Dunning and Justin Kruger.

Unlike the Duckworth-Lewis system, however, the Dunning-Kruger effect can cost businesses millions.

Essentially, it’s a cognitive bias whereby people who have limited knowledge in a certain domain significantly overestimate their abilities in that domain. They have a tendency to rely on the Internet as a way to fill in any gaps – but we all know the majority of the information we find online is unverified.

One of the quirks of being human is that, in an attempt to create order, we love to create patterns and regularity even when none exist.

Our minds are primed to try to decode, rearrange and make sense of the vast amount of disparate information we receive every day.

Not surprisingly, we frequently fail to comprehend how spectacularly bad we are at doing so.

Here’s the thing:

When you don’t know what you don’t know, the instinct is to take a mental shortcut. Bypass the subconscious blanks and arrive at a decision based on information we don’t have, but don’t know we don’t have.

Of course, none of this is made any easier by that fact that we’re not even looking in the right places when it comes to trying to identify credit fraudsters.

Today’s methods for ascertaining creditworthiness are heavily weighted towards the applicant’s credit history, and not on their intent.

The focus is on “can you pay” instead of “will you?”

Because while the majority of people who ask for credit do so for legitimate reasons, and with every intention of meeting their repayment obligations, not everyone is as well-intended.

But because they hide in plain sight, we don’t see them.

I realise I’ve been painting quite a bleak picture, but there is some good news – there’s a lot we can do to help ourselves.

Perhaps the most important thing is to gain a more realistic view of our own abilities and knowledge in a particular area.

There are several ways we can do this:

  • Keep learning. Never assume you know all there is to know about a subject. Dig deeper.
  • Ask for constructive criticism. It can be hard to hear, but it’s so valuable.
  • Never take things at face value. Question what you think you know. Challenge your beliefs and expectations. Deliberately find arguments that poke holes in your ideas.

The good news is, even though it’s unlikely fraud will ever be completely preventable, it is, without doubt, infinitely controllable.

The secret is to admit that there are things you don’t know you don’t know.

I can’t tell you how often people tell me they don’t have a fraud problem, and then a short while later they’re experiencing frightening delinquencies and write offs.

Of course, I understand that it’s impossible to solve a problem if you don’t know it exists. But that’s why I’m writing these articles.

To let you know that it exists.

To tell you about the gorillas.

But after that, it’s up to you to start looking for red flags.

Sun Tzu, the Ancient Chinese military general, wrote in his book, The Art of War, “To secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself.”

You just have to know what to look for, and where to look.

So, how do you do that?

In my experience, there are five types of fraud that are most likely to be hidden in plain sight:

Credit Washing

Despite its name, credit washing is a dirty business.

Essentially, a fraudster takes out a loan, then claims to be a victim of identity fraud in order to remove claims from their credit report and raise their credit score.

Even legitimate consumers often use this technique if they get into financial trouble. They falsely claim identity theft to remove a loan they cannot pay back.

It’s a swindle that seriously undermines lenders’ underwriting practices. Their losses go up because they’re making decisions based on the wrong information.

In the height of the Covid pandemic, reports coming out of the States indicated that around one in every seven people who had successfully applied for car financing had done so using a false identity.

One of the reasons why credit washing is such a significant threat is because of how difficult it is to detect. It’s also tricky to solve because once an identity theft claim is confirmed, the information disappears from that person’s credit report, never to be seen again.

Income Misrepresentation

Income misrepresentation is nothing new. People have, for various reasons, been lying about how much money they make ever since the advent of salaries.

It has never, however, been quite so easy for a would-be borrower to misrepresent the money they make for the purpose of securing credit – and get away with it.


Consumers are being squeezed financially more so than ever before. Price increases and inflation are outstripping pay increases. Which means applying for credit. And in order to stand a better chance of being approved, they feel they have to lie about their salaries.

Employment Misrepresentation

It’s frightening how simple it is for people to lie about their employment and simply pay for fake verification.

Local credit repair companies, and even social media platforms such as Telegram and Instagram are happy hunting grounds for people looking for this kind of service.

It’s all worryingly easy, and of course, the easier a method of fraud is, the more likely the bad guys (and the desperate guys) are to continue using it.

As long as doctored payslips, fake bank statements and false employer verifications are easy – and cheap – to get, people will continue committing fraud.

Fake Identity Documents

How can you be sure that the identity documents submitted with a credit application are real – and that they belong to the person making the application?

Even in a face-to-face, physical environment, it can be quite tricky for the untrained eye to spot the difference between a real ID and a fake one.

In an online environment, where you’re only looking at scanned copies, this is even more difficult.

And when you add the dark web into the mix, you create a whole new set of headaches. It’s a paradise for bad guys, giving identity thieves unparalleled access to counterfeit and stolen personal documents such as driving licences, birth certificates and passports.

It doesn’t take much for an experienced fraudster to manipulate these documents and pass them off as their own.

Even if you are able to prove the identity documents are genuine (not easy at all unless you have the latest and most sophisticated technology), you still have to ascertain whether the documents presented actually belong to the person presenting them.

I don’t know about you, but I look a heck of a lot different to the picture in my ID book, that was taken way back when I was 16!

Facial recognition software can help in this regard, as it accounts for aging. But how many credit bureaus in South Africa are privileged enough to have this kind of technology?

And sadly, not even the most sophisticated biometric systems are completely infallible.

Synthetic Identities

The is a phenomenon that continues to gather pace, and it works like this:

Rather than stealing and using an identity that already exists, savvy scammers are now creating their own false identities, using a mix of fabricated information with real personal data.

They look frightening real – fraudsters even go so far as to create false histories on other credit sources, such as short-term loan applications, for example, before then applying for additional services.

It used to be that verifying the personal details supplied on the application (name, date of birth, home address etc) were enough – when combined with trusted sources such as public records information – to confirm or refute an identity.

Unfortunately, in our increasingly digital world, traditional personal details are no longer enough to confirm identity.

We have to take things a few steps further, perhaps incorporating digital and physical identity attributes to confirm the authenticity of an identity.

However, as with all of the examples we’re talking about today, our only real hope of ever getting on top of these attributes is to be aware that they’re happening right underneath our noses.

An article on Experian’s website gives a great analogy:

Imagine biting into a cookie you think is chocolate chip, only to find that it’s filled with raisins. The raisins in the cookie were hiding in plain sight, indistinguishable from chocolate chips unless you took a much closer look.

This is how fraudsters work.

One of my main concerns is that many businesses don’t fully understand just how great their fraud exposure is. We’re talking icebergs here. And most of us only ever see the tip.

On top of this, it’s frustratingly difficult to prove in a court of law that you have been a victim of fraud – something you need to do in order to claim any kind of compensation.

Essentially, there are three basic elements you have to prove:

  1. Misstatement of Fact: the credit applicant lied on their application.
  2. Reliance on this Misstatement by the Victim: The lender relied on the false information and used it to make a decision that otherwise wouldn’t have been made.
  3. Material loss to the victim: Due to relying on the false information and taking it to be true, the lender has now experienced a financial loss.

So, at the end of the day, what does the future look like for the South African credit industry? What needs to happen to lessen the risks for lenders without penalising people who have no intention of defrauding the system?

Essentially, we need balance.

We need a system that allows people who will use their credit productively to access it more easily without increasing lender exposure.

We need new technology that bridges the gap between increasingly risk-averse lenders and a largely untapped market of people who have historically been invisible to them.

We need to place as much weight on borrower intent as borrower ability.

I am hopeful that the day will come – sooner rather than later – when we will see this happening more and more.

Where good people are not punished by systems set up to catch bad people.

But until then, it’s a classic case of forewarned is forearmed.

Now you know there are things you don’t know you don’t know!

Do what you can to fix that.

Because the more you do know – and know that you know – the more you’ll be able to lessen the incidences of fraud that are currently so prevalent in our credit system.