Solving Modern Crime in Financial Markets

Analytics and Case Studies

Marius-Cristian Frunza

• Publisher: Academic Press
• Year: 2015
• Print ISBN:
  9780128044940
• eBook ISBN:
  9780128045329
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

This comprehensive source of information about financial fraud delivers a mature approach to fraud detection and prevention. It brings together all important aspect of analytics used in investigating modern crime in financial markets and uses R for its statistical examples. It focuses on crime in financial markets as opposed to the financial industry, and it highlights technical aspects of crime detection and prevention as opposed to their qualitative aspects. For those with strong analytic skills, this book unleashes the usefulness of powerful predictive and prescriptive analytics in predicting and preventing modern crime in financial markets. - Interviews and case studies provide context and depth to examples - Case studies use R, the powerful statistical freeware tool - Useful in classroom and professional contexts

II

Forensic Statistics as an Investigation Tool (Theoretical Background)

Chapter 2A

Truth

A Game of Probabilities

Abstract

The use of probability theory and statistics as evidence in courts is a growing trend. However, it should be done under appropriate circumstances in order to avoid inexact conclusions. The confusion of the absolute probability with the conditional probability is a common fact that leads to various problems such as the prosecutor’s fallacy or the fraudster’s fallacy. Correctly understanding statistical tests is another challenge, especially in the juxtaposing of conclusions from multiple tests. White-collar criminals tend to act in moments of market or economic turbulence in order to induce the idea of false in cases where prosecutors try to statistically analyze their behaviors.

Keywords

Prosecutors fallacy

Conditional probabilities

Court

Forensic statistics

Outline

1 Outlook 129

The use of forensic sciences in courtrooms has become more prevalent with the increased sophistication of the investigation tools. Primary statistics are widely employed by attorneys to build their cases. A new use of statistics has emerged in litigations involving labor markets, antitrusts, and securities market cases. Nonetheless, statistical results can be easily twisted and taken out of context in order to support biased conclusions. Therefore, in courts of law the wrong judgments are made based on biased inferences.

The prosecutor’s fallacy introduced by Thompson and Schumann [57] is an inconsistent statistical reasoning made in law when the context in which the accused has been brought to court is falsely assumed to be irrelevant when weighing the evidence. The prosecutor’s fallacy can arise from the wrong interpretation of conditional probabilities or from data “overmining” such as when evidence is compared against a large database.

A classic example of the prosecutor’s fallacy discussed in the literature Dwyer [58] is the highly publicized case of Sally Clark. Two of Sally’s babies died prematurely a few weeks after birth. During a trial where ...

Table of contents

• Cover image
• Title page
• Table of Contents
• Copyright
• Preface
• Prologue
• Acknowledgments
• David Lee Kuo Chuen: Interview
• Laura Hutton: Interview
• I: Modern Financial Crime
• II: Forensic Statistics as an Investigation Tool (Theoretical Background)
• III: Investigation Crime on Financial Markets (Empirical Studies with Applications in R)
• IV: Case Studies (Applications in R)
• V: Preventing Crime and Preserving Markets’ Integrity
• Epilogue
• Bibliography
• Index