How does fraud work?

Some people fall into fraud traps, even some of these are highly educated and very
intelligent. Why do people fall into fraud traps? It is caused by information
asymmetry that if there is perfect information, fraud is impossible to exist. I
always believe that people always make their rationally best decisions while
constrained to their limited resources including time; therefore, people fall
into fraud traps because they are misled by the informationally asymmetric
set-up and misestimate the payoffs from entering the trap.

There are several ways to create such informationally asymmetric set-up. The first way is
to trick inexperienced or less educated people, as these people are very
unlikely to create good estimations about their payoffs. The second way is to
overstate the positive payoffs and the probability of succeeding. Such method
aims to misguide people's expectations; moreover, people tend to overestimate
the probability of having positive returns. Therefore, when the possible
positive return is overstated, it can lead to further overestimation of the
success probability. The third way is to overestimate the negative outcomes of
not entering the trap. People are loss aversion, so they are afraid of
suffering the losses they are told from not entering the trap.



Of course, there are other ways to make people easier to fall into fraud traps. However,
other ways are there merely for supporting the main three ways mentioned above.