This is a new series written by W.A. Wijewardene, Deputy Governor, Central Bank exclusively for The Sunday Times FT. The writer says when it comes to economic knowledge ‘all of us are babies’. This series is meant to inform, educate and provide in reader-friendly language economic issues and theories.
My friend, a very senior public servant, showed all signs of being extremely excited when he spoke to me on the phone. “I’ve got this letter by post,” he said demonstrating his uncontrolled euphoria. “It says that I have won an international lotto prize of two million US Dollars” He wanted to know how he should proceed to collect this unexpectedly fortune.
I didn’t answer him for a few moments. But, when I spoke to him, it was like dropping a bomb right on his head. “If I were you, I would have thrown that letter straight into the dustbin even without opening it,” I said. I sensed that he became speechless for a few seconds, because he didn’t expect that response from me. After he overcame his initial puzzlement, he wanted me to explain why I said so.
“Look” I said. “It’s easy to understand. Ask the question why someone wants to give you this big fortune, when he himself could have enjoyed it. What’s your significance to him so as to become so altruistic towards you when he even doesn’t know you?”
He murmured for awhile, but reluctantly agreed with me when he saw the logic. He wanted to know more.
“These people are international crooks who prey upon gullible innocents,” I continued. “I myself get five to six emails or letters a day telling me about an unexpected fortune of one type or another that I’ve got. Or, sometimes, it’s an offer of some investment opportunity from a relative of a known or unknown African dictator. But, the pattern is the same. They all offer enormous cash fortunes which we can’t think of gaining in our whole life. So, we’re tempted to buy what they offer and end up losing the small money we already have,” I said.
“But, if they’re cheats as you say, how can they operate so long without being caught by the Police?”
“The main reason is that they use today’s technology to operate without a territory, so that they are like thieves in the cyber-space. They shift from one web site to another and you can’t trace them. The other reason is that we lose only a small sum like two to three hundred US Dollars and the loss isn’t worth for us to incur a high prosecution expenditure. Furthermore, it’s a damn shame and a loss of face for a well reputed person to be known as being duped by these types of cronies. So, many choose not to report,” I said. “So, what’s their modus operandi?” he inquired.
“They first send this letter or email suggesting the enormous cash fortune. If you become tempted and respond, then they send you a further correspondence and it’s in that correspondence that they lay out the plan to screw your money”. “How?” my incredulous friend barked at me over the phone. Obviously, he didn’t like the way the conversation was going. “They very smartly draft and produce the letter of offer to catch you. Those letters normally say that money involved in the offer is waiting in some bank pending instructions on the actual payment.
Sometimes, they give even the name of that bank. But these banks are just namesakes and do not really exist.
Then, they say that the processing of your application has some costs and ask you to send two hundred US Dollars or a similar amount or agree to collect this by charging to your credit card number.
The way that the letter is presented, you actually believe that money is waiting there to be paid to you and the only hitch is in your not meeting this processing fee. So, you’re psychologically attuned and tell yourself ‘why not spend two hundred dollars and get two million’.
You pay and wait and wait, but your promised prize money is never sent to you”
“You seem to be very cynical. How do you know all these things?” His tone sounded his dislike of being told of his ignorance. So, I continued cautiously so as not to offend him.
“I myself have been fooled once” I admitted. “So, my knowledge is first-hand. But, once I was bitten, I became twice shy. I re-examined my folly. Then I realized that I was an ignorant fool or rather a baby relating to economic knowledge. That realization made me wiser,” I said.
“Tell me more.” He became completely docile for it appeared that his initial feeling of shame had now disappeared.
Economists call this ‘irrational ignorance’. Ignorance, as against ‘knowledge’, is a situation where we fashion our mind to believe only one of the two things, good or bad.
If we practice knowledge, we compare both good and bad before we make a decision. Here, because we want to be ignorant, we look at only the supposedly benefit, but not the costs or the risks. We’re irrational, because we’re guided by emotions, prejudices or biases and not by the beauty of equanimity or the objectivity which a rational mind possesses. Our destructive emotion here is ‘greed’, so we can’t see anything clearly.
We become gullible to others, because, instead of cultivating ‘rational knowledge’, we succumb to ‘irrational ignorance’. As long as we’re like that, a smarter fellow would take advantage of us.” I preached to him a long sermon on economics of knowledge and rationality.
He listened to me and didn’t speak for sometime. Then, he asked me what he should do now.
“You can learn it by yourself. Just, tell them that you’re happy and ask for further instructions.
Then, you would get the letter asking you to pay the processing fee” I said.
“Then, what?” he questioned. “Ask them to deduct the processing fee from the prize money and pay you the balance!”