Have you ever been subjected to an investment fraudster’s sales pitch or received unsolicited calls? If not, you probably know someone who has.
History has seen countless investment frauds, scams, cons, schemes, and swindles. Investment fraud is any scheme or deceptive practice relating to investments that convinces investors to make decisions based on false or misleading information. Such frauds are perpetuated by what some call ‘financial serial killers’ and often result in losses and violate securities laws.
Fraud victims around the world have lost hundreds of billions of dollars in the last decade to investment fraud. This article explains why people fall for scams and then discusses how to avoid fraud and recognise some warning signs.
Why people fall for investment fraud
Do not assume that you are immune to investment fraud because of your education, background, or business savvy. Even highly successful, financially intelligent people fall
prey to such trickery.
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 scams for many reasons:
- People are gullible. 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. Fraudsters prey on this trusting nature.
- People are sometimes irrational. Everyone occasionally makes quick, irrational decisions. Those who are impulsive, driven by emotion, or non-reflective are particularly susceptible to becoming prey to con artists. Fraudsters 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.
- People are attracted to financial gain. The lure of ‘get-rich-quick’ schemes inflames 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. Realistic gains are one thing, but when an investment looks too good to be true, it probably is.
- 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. They may have difficulty saying no to experts because 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 a reasonably good return in order to lure them into making larger investments later. Scammers 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. Con artists 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 counter-intuitive, those who have investing experience are often susceptible to investment fraud. Such individuals think they are too smart to fall for a scam. This psychological bias called the illusion of knowledge.
- People tend to trust authority and credentials. People often place their trust in authority such as from a respected institution or an individual holding a status position. Thus, scam artists send fraudulent emails that appear to be from trusted organisations such as banks and brokerage firms. Additionally, they create fake diplomas and credentials, pretending to have a knowledge or competence that they lack.
Please read our article on Avoiding Investment Scams
If you want to find out anything further about this topic then please feel free to call on 01494 786000, 0207 240 2000 or 07961 116321. All conversations will be in strict confidence. You can also email email@example.com This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.