Don’t assume that you’re immune to investment fraud because of your education, background, or business savvy. Even highly successful, financially intelligent people fall prey to such trickery. For example, Bernie Madoff’s notorious Ponzi scheme fooled thousands of individuals, including celebrities as well as financial institutions and universities. Anyone with money is at risk of investment fraud. Fraudsters are students of human nature and use persuasive techniques tailored to the victim’s psychological profile.
People fall for investment frauds and scams for many reasons.
People are gullible and curious
According to an old saying commonly but incorrectly attributed to P.T. Barnum, an American showman, “There’s a sucker born every minute.” Those who have a tendency to trust easily are especially vulnerable because they believe what people tell them. They think that everything really is what it appears to be. When they get a fact that doesn’t exactly fit in the puzzle, they tend to force it to fit. Fraudsters and scammers prey on this trusting nature. Curiosity can also pull people into a scam.
People are sometimes irrational
Everyone occasionally makes quick, irrational decisions. Those who are impulsive, driven by emotion, or nonreflective are particularly susceptible to becoming prey to con artists. Fraudsters and scammers frequently stress the need for fast action to avoid missing out on a “once-in-a-lifetime investment opportunity.” This tactic is highly effective on those who act impulsively. But don’t be foolish – these once-in-a-lifetime offers are likely to turn your pockets inside-out.
People are attracted to financial gain
The lure of “get-rich-quick” schemes flames the innate desire to become financially better off. Most schemes promise that participants can obtain a high rate of return with little risk, skill, effort, or time. In practice, true opportunities come infrequently. Realistic gains are one thing, but when an investment looks too good to be true, it usually is. As Warren Buffett notes, “Nothing sedates rationality like large doses of effortless money.”
People are uncertain about the financial environment
When people feel uncertain about financial decisions, they often turn to others who appear or proclaim to be experts, and to groups with which they share some kind of connection, such as religious or ethnic communities and professional groups. People often have difficulty saying no to experts or members of affinity groups of which they are a part because these individuals trust that they are being steered in the right direction.
People are overly optimistic
Those who suffer from “optimism bias” are more likely to be hoodwinked than others. Optimism bias refers to the tendency to overestimate the likelihood that good things will happen and underestimate the potential for unpleasant events. Fraudsters play to this tendency by making good things happen initially reinforcing an investor’s decision. For example, they ask investors to make a small initial investment that pays off to lure them into making larger investments later. Fraudsters also accentuate the positive by either downplaying or avoiding the possibility of bad things occurring as a result of an investment.
People want to feel special
People have a psychological need to feel special. Fraudsters play upon this need by convincing investors that they are part of an “exclusive club” and are being given special access to an investment opportunity. This ploy is called the illusion of inclusion. The perceived scarcity of the number of people involved in the investment makes the target feel special and more likely to invest.
People are more vulnerable when they believe they are knowledgeable
Despite appearing counterintuitive, those who have some experience in investing or believe they are experts are often more susceptible to investment fraud than others. Such people think they know more than they actually do or that they’re too smart to fall for a fraud or scam. This psychological bias called the illusion of knowledge.
People tend to trust authority and credentials
People often place their trust in authority, whether this is a respected institution or an individual holding a status position. Thus, scam artists send fraudulent emails that appear to be from trusted organizations such as banks and brokerage firms. Additionally, they create fake diplomas and credentials, pretending to have a certain level of knowledge or competence that they lack.