What is the Psychology of Fraud?

We all know that insurance fraud costs insurers and insureds billions annually. The real question is why do people commit fraud? Is it always because of monetary reasons?

Two critical frameworks help us understand why people commit fraud: Dark Triad Theory and the Fraud Triangle. Each model offers unique insights into the psychological and situational factors that contribute to a person engaging in fraudulent behavior. This article will include our extensive research-based evidence and real world examples of how these theores apply to insurance fraud. 

What is the Dark Triad?

The Dark Triad (DT) Theory, introduced by Paulhus and Williams in 2002, spotlights three notorious personality traits that might sound familiar from your college psychology course: 

1. Psychopathy
2. Narcissism
3. Machiavellianism

These traits are used by psychologists to explain unethical behaviors such as manipulation, and deceit (Lee & Ashton, 2005).

Psychopathy and Insurance Fraud

In fraud, a person with psychopathic traits might act impulsively. For example they are more likely to file a false claim about a damaged vehicle in the heat of the moment – without an elaborate plan.

Machiavellianism’s Deceptive Edge

Machiavellianism shares traits with psychopathy but includes calculated, manipulative tendencies.

This type of individual is ready to use violence to achieve his goals, but only when he/she calculates doing so is necessary and will be effective. They are usually detached from traditional morality and are open to exploiting opportunities to gain the upper hand. Think of an individual falsifying a property damage claim, carefully creating a believable story. (McHoskey, Worzel, & Szyarto, 1998).

Some pop culture fictional examples of Machiavellianism include: 

• Lord peter Baelish from game of thrones
• Frank Underwood from Netflix’s house of cards

Narcissism and Fraudulent Behavior

Narcissism is characterized by arrogance, entitlement, and a desire for admiration. Fraudulent actions linked to narcissism often stem from ego-driven motives. A narcissistic individual might commit fraud as an expression of their perceived superiority, such as over-claiming or exaggerating damages (O’Boyle, Forsyth, Banks, & McDaniel, 2012).

Example:

A study in the UK suggested that  Dark Triad traits are linked to insurance fraud and dishonest behaviors, both individually and as a collective construct. (Modic, Palomaki, Drosinou, & Laakasuo, 2018).

The Psychology of Fraud: Three Key Elements of Fraud

Introduction:

In contrast to Dark Triad personalities, most people who commit fraud follow a simpler model—the Fraud Triangle. This model explains that three conditions must be present for the average person to commit fraud :

1. Opportunity
2. Motive (or pressure)
3. Rationalization. 

This section will break down each element.

Opportunity – The Gateway to Fraud

Opportunity is the most critical factor in the Fraud Triangle. Fraudsters need an opening, whether it’s low oversight or poor controls. For instance, 35% of organizational fraud in 2020 came from companies lacking internal controls (ACFE, 2020). 

Motive/Pressure – The Driving Force

Motive, often financial pressure or incentive, pushes individuals toward fraud. Common motivations include medical bills, gambling debts, or job loss. The person might initially commit fraud to relieve pressure from a touch situation but continue once they see how easy it can be.

Rationalization – Justifying the Act

Rationalization is the moral justification that allows people to commit fraud while still viewing themselves as good individuals. 

It’s hard to sleep at night if you think of yourself as a thief or liar. Therefore someone might justify inflating a claim by thinking, “I’ve been paying premiums for years; I deserve this.”

Example:

A well-compensated individual with low financial pressure is less likely to commit fraud, but someone facing high debt and little oversight is far more likely to rationalize their behavior and eventually follow through with fraud. (Kniepmann, 2020).

Who Commits Insurance Fraud?

Fraudsters come from all walks of life. Two common misconceptions are that fraud is less widespread than it is and that only certain demographics, like the young or unemployed, are involved. This section will dispel these myths using evidence from both older and younger generations.

The Hidden Reality of Fraud Costs

The Coalition Against Insurance Fraud estimates that fraud costs Americans $80 billion annually. To put this in perspective, that’s more than the federal government will spend on cancer research over the next 16 years.

Older Generations and Fraud

Many people believe older generations are less likely to commit fraud due to assumed ethical standards. However, financial pressures in retirement, rising healthcare costs, and increased life expectancy can make older individuals just as likely to commit fraud as younger people (Smith, 2018).

Millennials and Fraud Trends

Millennials, despite their high ethical standards in many areas, are more accepting of insurance fraud than other age groups. A 2011 study found that younger adults were more likely to submit exaggerated or false claims (CAIF, Smith, 2018). Given that this age group now makes up 46% of the workforce, the industry must remain vigilant.

Example:

With 10,000 Americans turning 65 every day, it’s crucial to remain proactive in combating fraud among older populations (Smith, 2018).

Understanding the dark triad theory and the triangle of fraud will make you more aware in your every day like but also help you stop fraud before it even starts. 

Think of Walter White from Breaking Bad or Jordan Belfort from The Wolf of Wall Street. These characters didn’t start off as villains—they were ordinary people who got swept up in greed, pressure, and opportunity. Most of us would like to think we would never commit the acts these fictional characters engaged in but isn’t that what most people think – until they don’t? 

That’s what makes fraud so complex, unsettling and interesting. Under the right (or wrong) circumstances, almost anyone can cross the line. The psychological principle behind this is known as the Fraud Triangle, which says most people will give in to unethical behavior when faced with enough pressure, a clear opportunity, and the ability to rationalize their actions. Whether it’s the allure of financial gain, the desperation of mounting debt, or simply a lapse in judgment, these triggers can push someone into doing things they never thought they’d do. To prevent this, watch for sudden changes in behavior, financial stressors, or access to unchecked opportunities—these red flags are often the precursors to crossing that ethical boundary. 

https://www.sec.gov/files/elder-financial-exploitation.pdf

https://www.ncoa.org/article/addressing-the-nations-retirement-crisis-the-80-percent-financially-struggling/

(https://www.tandfonline.com/doi/full/10.1080/23311908.2018.1469579#abstract)