FINRA, Claptrap, Fraud, Mental Frames, and Subjective Construals

September 23, 2021

As readers of the Securities Industry Commentator and the Blog know all too well, publisher Bill Singer is no fan of FINRA's Investor Education Foundation. Beyond the self-professed goal of educating investors, much of what the FINRA Foundation publishes is little more than claptrap. Sadly, in corporate America, that's what so-called activism tends to look like. You publish lots of press releases, you pay for lots of studies, you donate a few bucks here and there amid much fanfare, but, ultimately, it all comes off as more marketing than accomplishment. My suspicion is that this is by design. It's all so carefully manicured to look righteous without actually being so.

In a recent, now-infamous undertaking funded by the FINRA Foundation, we came across Exhibit One for all that is misguided with the FINRA Foundation: "Dubious FINRA Study Finds Female Arkansas Prison Inmates Are Usually Poor And Financially Illiterate" ( Blog / July 24, 2020)  In my sarcastic, biting, cynical critique of the 2020 female inmate study, I observed in part that:

Oh for godsakes, really?  Another dubious study promoted by the FINRA Investor Education Foundation. Now, please, don't get me wrong. I wholeheartedly endorse studies about gender, racial, and ethnic discrimination and harassment, and how such pernicious conduct manifests itself financially and economically. If you are familiar with my published body of work, you will find that I frequently champion victims of Wall Street discriminatory practices. That being said, just how much money did FINRA spend on this study and its promotion? What exactly was the unanticipated, surprising results of the study? Did FINRA and the authors expect that a survey of 515 Arkansas inmates would show that said population ranks among the top 1% of wealthy individuals? Did those investigating this group expect that the inmates were financially literate or would have impressive financial assets? Were the investigators anticipating that incarcerated women would have higher financial literacy and more financial assets than incarcerated men? 

Not to be too cynical or snarky here (but I'm going to be just that) but there are some postulates that don't require expensive studies to confirm. For example, I imagine that incarcerated men and women have, on average, fewer Frequent Flyer Miles than those who have never been incarcerated; and, similarly, that said inmate population has on a percentage basis fewer PhDs than in the non-inmate population. Frankly, if FINRA has money to throw around on such studies, I would have much preferred that the funds were earmarked for outright financial grants to the Arkansas female inmates rather than for studies about their dire financial straits. 

From Inmates to Mental Frames

Adding yet further insult to injury, the FINRA Foundation just issued: "New Research Examines Why Some Consumers are More Vulnerable to Financial Scams" (FINRA News Release / September 22, 2021),  As trumpeted in the FINRA News Release:

New findings from a two-year study bring researchers closer to understanding why some people are more likely to lose money to financial fraud. The FINRA Investor Education Foundation (FINRA Foundation), Better Business Bureau (BBB) Institute for Marketplace Trust, and the University of Minnesota completed the study, Exposed to Scams: Can Challenging Consumers' Beliefs Protect Them from Fraud?, in advance of World Investor Week, October 4-10, 2021.

Mind you, the FINRA Foundation, the BBB Institute for Marketplace Trust, and the University of Minnesota spent two years -- TWO years -- on this study: "Exposed to Scams / CAN CHALLENGING CONSUMERS' BELIEFS PROTECT THEM FROM FRAUD?" (September 2021) As summarized in the FINRA News Release, here are the riveting findings of the two-year study:

Investigators found that the attitudes and beliefs shaping the ways study participants looked at the world-known as "mental frames"-may have influenced the way they reacted to scams. Specifically, researchers propose that mental frames governing compliance, opportunity, intelligence, and order may have affected the way that interviewees interpreted what scammers told them. Individuals were more likely to lose money if they believed that:

  • Authority should not be challenged.
  • Financial opportunities are a zero-sum game with clear winners and losers.
  • The world is organized in a way that rewards good people.
  • Asking too many questions can make a person seem ignorant.

Mental frames? Not "metal" frames. Not "wood" frames. But mental frames. 

The Magnificent 17

It gets worse. Instead of a study involving, say, thousands or tens of thousands of subjects who were actually victimized by Wall Street fraud, this is what constitutes the two-year rigorous inquiry:

This paper covers what researchers learned from in-depth, in-person interviews with 17 people who recounted their experiences with fraud attempts. Ten individuals lost money to scams while seven did not.

17 people. 17? 17?? That's it??? Frankly, that's not a study, that's just about a brunch.

And what, pray tell, did all that intense research involving these 17 talkative folks teach us? According to the study:

Based on findings from these interviews, researchers defined four mental frames - or default ways of thinking about the world - that appeared to play a strong role in the way interviewees perceived fraud attempts and whether or not they lost money to scams. 

This paper describes how mental frames may have made some interviewees more susceptible to fraud. It also describes how mental frames are constructed from what we learn, both in school and in social experiences. Implications for consumer education and prevention programs are also discussed.

Again with the Mental Frames? You mean like something that you put around a picture and hang on your wall? Here, in all its dis-glory, is the formal, scientific explanation provided in the report:

What Are Mental Frames? How Do They Work?

All human learning, whether formal or informal, is socially based. Our response to life events is shaped by our perception of reality, which reflects what we have learned from our schooling, our experiences and our interactions with others. 

The narratives we hold - whether subconsciously or consciously - guide our thinking and our reactions to money, people, power, authority and other aspects of life. Broader narratives that help us understand the world around us may also determine whether we will resist a financial scam or lose money to one. 

Narratives have the power to guide our actions because they define, and even dramatize, the most likely causes of our actions. If we tell ourselves the world works in a certain way, or that the world has been shaped by certain circumstances, we will take actions that align with our inner narrative. 

This explains how our narratives become powerful mental frames that help us evaluate situations and make choices. These mental frames create a set of rules that direct our decisions and behavior.

Subjective Construals

After two-years' research, the FINRA Foundation paid for and received a report about how to hang mental frames - or that's sort of what I'm comin' away with. As to the very deep and profound implications of such findings, under the heading "Study Implications" on page 27, we are told in part that:

We are encouraged by these findings because we know that the subjective construals people hold - the meanings they assign to things and experiences - can be modified. Social psychologists have shown that even brief, simple exercises can change behavior, especially if the exercises target the subjective views and social norms that drive behavior. 

For example, teaching students that intelligence is not a fixed trait but, instead, can be exercised and can grow like a muscle, may significantly increase academic achievement (Blackwell, Trzesniewski & Dweck, 2007). Another experiment with college freshmen showed that a one-hour exercise affirming that feelings of anxiety are normal when moving to a new school increased their grades over a three-year period, particularly among minority students (Walton & Cohen, 2011).

By the way, has anyone seen an infomercial for a machine that I can use to exercise my intelligence so that it will grow like a muscle? Also, is that one-hour anxiety exercise suggested for college freshmen similar to another study where they suggested one hour of masturbation? But I digress. Clearly, the solution to Wall Street fraud is found in subjective construals; and all along, I was saying to myself, Bill, that's what I usually call myself except on days when I call myself "Kal-El," but that's a whole, long story and mom and pa, the Kents, prefer that I not go into the Kal-El thing, so let's just stick with Bill, which is what I call myself when I'm speaking to myself, okay? So, where were we?  Oh, yeah, so I was saying to myself, Bill, you were wrong and it's a damn good thing that you read this two-year FINRA Foundation report involving the 17 storytellers because you always thought that it was the objective construals that needed to be modified. Never in my wildest imagination did I think that by modifying the subjective construals that I could root out pernicious elder fraud and the financial depravities practiced by con artists. Then again, most guitar amps only go to 10 but you can modify the dial so that they go to 11, which, sure, doesn't make the amp any louder but you are going from a mere 10 to a very rare 11, which is one digit more than a 10.

Counternarratives and Reshaped Mental Frames

At the end of  the FINRA Foundation-funded study, it all comes together. Here is how the authors sign off:

If we can better understand how assumptions and beliefs color an individual's reaction to financial scams, we can promote counternarratives that may reshape mental frames and strengthen decision-making skills. Challenging broadly held narratives can have significant social implications. In fact, when new narratives are embraced by large groups, they can power global economic and social events (Schiller, 2019).

Yeah, sure. That's the answer. I can't wait to see what the FINRA Foundation will pay for the next report on how to promote counternarratives in order to reshape mental frames and strengthen decision-making skills. Maybe the researchers will interview 18 or more subjects provided that FINRA foots the bill?

'Smores Anyone?

At present, the FINRA broker-dealer community is struggling with a raging Covid pandemic and uncertain economy. Smaller FINRA member firms are in desperate straits. Years ago, much-needed market reforms slashed the artificial spread between Bid and Ask, and although benefiting the investing public, once lucrative market-making revenue dried up. One source of income for smaller firms was largely eviscerated.  In more recent times, commission income has disappeared with the shift to Zero Commissions. Another revenue stream has vanished. Instead of some help and innovation from FINRA and its lackluster Board of Governors, the small firm community senses that it is on life support and losing the fight. On top of that, those same moribund member firms watch as FINRA's own operating losses mount despite what seems an increase in staffing, an increase in fees, an increase in fines, and an endless supply of FINRA Foundation-funded studies. Talk to enough smaller FINRA member firms and you'll find out that they see FINRA as an ever-inflating balloon. And as FINRA's footprint gets bigger, so do the costs of compliance. Many say that the handwriting is on the wall. The FINRA broker-dealer model is dead. Broken. Outdated. The numbers of smaller firms continue to dwindle, likely inexorably, while a few large firms become behemoths and aggregate more influence and more power. Sadly, those who sit on FINRA's Board have no ideas. They lack practical solutions. They fund crapola about mental frames and subjective construals. It's as if we're all toasting marshmallows while Wall Street burns. 'Smores anyone?

The Wall Street Anti-Fraud Fund

In my criticism with the FINRA Foundation's July 2020 Arkansas female inmate study, I observed that:

Frankly, if FINRA has money to throw around on such studies, I would have much preferred that the funds were earmarked for outright financial grants to the Arkansas female inmates rather than for studies about their dire financial straits. 

In keeping with my above suggestion. I urge FINRA to create a Wall Street Anti-Fraud Fund, a proposal that I have made for some two decades and which continues to fall on deaf ears. Wall Street should have an "Anti-Fraud Fund" for the benefit of defrauded public customers who have proven the liability of a FINRA member firm but are unable to fully collect their compensatory damages, costs, and fees because of that firm's insolvency. I do not favor extending such a guaranty into punitive damages or "unreasonable" attorneys' fee and other charges. Fervently, I believe that the securities industry has the wherewithal and the moral/ethical obligation to put its money where its dirty mouth has been. There may be legitimate debate as to how best to fund the anti-fraud fund, but that only goes to the mechanics of doing the right thing. Unfortunately, neither FINRA nor the FINRA Foundation have joined to support my antifraud fund proposal -- which makes me wonder about each organization's mental frames and subjective construals.