Vivek Kaul: Fast thinking is the great enabler of digital fraud

The digital system as it has evolved is at the heart of such things. Until a few years ago, selling an idea or an investment scheme required gathering people in a room. Also, threats had to be made face-to-face or by a phone call; a ‘digital arrest’ was inconceivable. And frauds lacked scale.

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The digital economy has broken this dynamic, allowing scamsters to reach more people quickly and also reducing the gap between someone receiving a proposition and thinking and acting on it. This encourages what the Nobel prize winning psychologist Daniel Kahneman referred to as ‘System 1 thinking.’

As Richard Thaler and Cass Sunstein write in Nudge: “It is useful to imagine the workings of the brain as consisting of two… systems. One is fast and intuitive [System 1]; the other is slow and reflective [System 2]."

Let’s consider the WhatsApp money transfer scam. The year is 2015. A friend messages you asking for some money. Chances are you would have had to find a computer, log into your bank account, add them as a beneficiary and then transfer money. While doing all this, you might have just called your friend and discovered that their WhatsApp account has been compromised. Of course, hacking a WhatsApp account in 2015 would have been far more difficult.

Now, cut to March 2025. Your boss is breathing down your neck to meet your annual sales target and you get a message from a friend asking for a small loan. You don’t bat an eyelid, open an app, transfer the money and get scammed. This is System 1 thinking. It doesn’t let you consider that something might be amiss. The mobile phone, which is now not just a communication device, but something that can be used to transfer money, aids this thinking.

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Now, let’s say there is a financial influencer who you have closely been following. One day you see a video by this influencer explaining a strategy for making quick money by investing in financial derivatives. You are on your way to the office, but that doesn’t stop you from logging on to an app and doing what needs to be done.

Again, System 1 thinking is at work. And given that this thinking tends to be unconscious, it’s hardly surprising that nine out of every ten individuals who trade in derivatives lose money. Yet, in recent times, the trading volumes of derivatives have gone through the roof.

Now, this would have been difficult to execute previously. Influencers would have found it next to impossible to build their brand profiles without mainstream media. Also, given that most people did not use smartphone apps to invest, the chances of System 2 thinking being used were slightly better.

Now, let’s consider the digital arrest scam. You get a video call saying you have been digitally arrested. You don’t want to believe what you are being told, but the scamsters sound convincing. They have your bank account number, Aadhaar number and appear to be wearing police uniforms. System 1 thinking takes over and you transfer the money being demanded.

Again, this would have been difficult to do earlier. First, video calls were difficult to make. Second, not so much of our private confidential data was available in the public domain, like it is now, thanks to leaky digital systems. Third, transferring money digitally wasn’t as easy.

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Indeed, the system as it has evolved encourages you not to think through things. It doesn’t want you to be mindful of what you are doing. And scamsters and others, like online gambling and gaming websites, make use of this. As Johann Hari writes in Stolen Focus: “You are living in a system that is pouring acid on your attention."

The good part is that regulators are finally playing catch up. The Reserve Bank of India has been putting out advertisements warning of such scams. Further, Ananth Narayan, a whole-time member of the Securities and Exchange Board of India (Sebi), recently revealed that since October 2024, the securities regulator has successfully taken down over 70,000 misleading investment handles and social media posts. Sebi has also had some success in trying to disincentivize trading in derivatives.

Finally, lest I get accused of being a Luddite, let me say I am not one. But the truth is that there is a dark side to the digitization of the economy, or the so-called democratization of finance, which doesn’t get talked about enough.

This is primarily because the broad agenda around any new technology is set by tech sellers and not by society at large. As David Edgerton writes in The Shock of the Old: “Too often the agenda for discussing the… future of technology is set by promoters of new technologies."

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The techno optimism of tech promoters sells well. They rarely talk about second-order effects and the negative impact of digitization. But the flip side also needs to be discussed threadbare. As the American writer James Baldwin once said: “Not everything that is faced can be changed; but nothing can be changed until it is faced."

The author is the author of ‘Bad Money’.