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Optimism Bias & Fraud

Optimism bias is a cognitive bias that causes someone to believe that they themselves are less likely to experience a negative event. (Wikipedia) Maybe that should be the definition of fraud.

Many people never honestly think they will be a victim of fraud. Maybe they think they are too smart. Or they only hire good people. Or they have a CPA who does their books. What is even more frightening is that many people will have higher rates of optimism bias toward negative events. This is called the valence effect. I had never even heard of that specific term. What does that mean? They have generally found that unrealistic optimism was greater for negative than positive events.

In presentations to small businesses, no one talks about how it is going to happen to them. I mean they think it can happen to the business owner sitting next to them but not to themselves.

I’m all for being optimistic but let’s at least be realistic about the costs of fraud. It is always more expensive to react to a fraud than to do the work on the front end. No signature stamps, use positive pay, mandatory vacations, segregation of duties…

Stay optimistic but verify.

FraudKelly Paxton