Scams: Why People Fall For Investment Schemes

Investment schemes are a type of fraudulent activity that prey on common human vulnerabilities such as fear, greed, and the need to belong. These schemes often present an illusion of wealth and status, exploiting the fear of missing out. They offer high returns with little to no risk, playing on people's desire for easy money. The promoters of such schemes use aggressive sales tactics and establish trust through social media influencers and celebrities to lure investors. Additionally, the complexity of certain investment products and the involvement of unlicensed salespeople make it challenging for individuals to make informed decisions.

Fear of missing out

The fear of missing out (FOMO) is a powerful psychological force that can lead people to make poor financial decisions. It is a form of social anxiety, a compulsive concern that one might miss an opportunity or satisfying event, often aroused by posts seen on social media.

People tend to cluster around risky investments to avoid missing out on "the next big thing". This herding behaviour is driven by a desire to keep up with their peers, and the fear of being the only one to miss out. The cost of living in a community often depends on the wealth of its residents, so investors fear being poor when everyone around them is rich. This fear of relative poverty is a powerful motivator for investors to choose portfolios that look similar to those of their peers.

Social media platforms are a significant source of FOMO, with influencers and experts touting "hot" investments such as cryptocurrency, meme stocks, and special purpose acquisition companies (SPACs). These assets are promoted as a way to make large amounts of money, but the risks are often downplayed or not disclosed.

FOMO can lead investors to take on excessive risk and make impulsive decisions. It can cause people to focus on short-term gains rather than long-term financial goals and can result in financial devastation if the investments collapse.

To counter FOMO, it is important to slow down and research investment opportunities. Trusted financial advisors can help investors craft strategies that are aligned with their goals and risk tolerance. It is also important to remember that complex investments are not necessarily better than more straightforward ones and that it is best to avoid investments that are difficult to understand, as they often carry additional risk.

Lack of financial knowledge

A lack of financial knowledge is a significant factor in why people fall for investment schemes. Financial illiteracy makes it easier for so-called investment companies to lure people into pouring their money into dodgy schemes.

Financial literacy is a combination of awareness, knowledge, skills, attitudes, and behaviours necessary to make sound financial decisions and achieve individual well-being. It includes understanding the importance of savings, avoiding unproductive loans, learning about interest rates, the power of compounding, and the influence of inflation. However, many people lack this basic financial knowledge, making them vulnerable to investment scams.

For example, in India, 76% of people lack financial knowledge, and only 24% of adults are financially literate, according to the Standard & Poor's Ratings Services Global FinLit Survey of 2016. This lack of financial literacy has led to people losing money in Ponzi schemes. Similarly, in the Philippines, a financial advisor, Philip Vincent Tolentino, warned of the dangers of investment schemes promising huge monetary rewards, stating that they prey on people's financial hardships and desperation for quick fixes.

The rise of social media and influencer culture has also contributed to the problem. With financial influencers and get-rich-quick schemes all over social media, people are bombarded with messages that everyone is getting rich quickly except them. This fear of missing out (FOMO) can lead people to make impulsive and risky financial decisions.

Furthermore, financial education is often lacking in schools. In the US, nearly half of the students nationwide lack access to a formal financial education. As a result, they turn to social media, parents, or peers for financial advice, which may not always be reliable.

The consequences of financial illiteracy can be devastating, with people losing their life savings and falling into debt. Therefore, it is crucial to address this issue through education and awareness campaigns to prevent people from falling victim to investment scams.

High-pressure sales tactics

Pitch at Any Opportunity

A high-pressure salesperson will not wait for the perfect moment to pitch their product or service. They will take any opportunity to start selling, whether it is through a phone call or face-to-face interaction. They will not waste time building a relationship with the customer and will launch into their pitch as soon as they make eye contact.

Catastrophize Inaction

High-pressure salespeople often point out the negative consequences of not taking action immediately. They may claim that inaction will lead to disastrous outcomes for the customer's business or even their job. By doing so, they create a sense of fear and urgency, pressuring the customer to make a rushed decision.

Fear-Based Selling

This tactic involves using fear to convince customers that they will miss out on a great opportunity if they don't buy now. They may use phrases like "Act now or miss out," suggesting that the product is in high demand and may not be available soon. This tactic preys on the customer's fear of missing out (FOMO) and can be effective in getting them to make an impulsive purchase.

Assume a Deal Has Been Reached

Another common tactic is to assume that the customer has already agreed to the sale. For example, they may start wrapping up the product or placing items in bags, giving the impression that the sale is final. This puts the customer in a position where they feel obligated to follow through with the purchase.

Highlight Special Promotions

High-pressure salespeople often take advantage of sales, promotions, and discounts to create a sense of urgency. They may offer "limited-time" discounts or one-time promotions, pressuring customers to make an immediate decision. This tactic can be effective, but it can also backfire if customers feel they don't have enough time to make an informed choice.

Ignore Client Sustainability

High-pressure salespeople often focus on making a sale without considering the customer's best interests or financial situation. They may push products or services that are unsuitable or unsustainable for the customer, violating rules set by financial regulatory bodies like FINRA. This tactic prioritizes short-term gains over the customer's long-term well-being.

Use Manipulative Talk

High-pressure salespeople are masters of manipulation. They use various techniques to talk someone into buying, such as playing down the customer's desire to consult with others before purchasing. They may also use flattery or play to the customer's ego to make them more receptive to the pitch.

Make Outrageous Promises

To close a deal, high-pressure salespeople may make unrealistic promises or guarantees about the product or investment. For example, they may portray rumours as certainties or claim "insider information" to create a sense of exclusivity. These promises often violate rules prohibiting deceitful behaviour in selling securities.

Constant Calling

Even after a customer has expressed disinterest, high-pressure salespeople may continue to call or contact them persistently. This tactic can be frustrating and off-putting for customers, making the company seem desperate and untrustworthy.

Subtle Intimidation or Threats

While most salespeople won't make direct threats, they may use passive-aggressive tactics to intimidate customers. For example, they may imply that the customer will regret not making the purchase or suggest negative consequences if they don't buy. These tactics can damage the relationship and trust between the salesperson and the customer.

Aggressive Discrediting of Competitors

In their eagerness to make a sale, high-pressure salespeople may resort to aggressively discrediting competitors' products or services. Customers often view this behaviour as unprofessional and manipulative, and it can lead to legal action if the statements are false or misleading.

Omitting Material Facts

High-pressure salespeople may neglect to provide customers with all the relevant information about an investment or product. They may omit material facts, such as revenue or operating history, to portray a misleading picture. This practice is deceitful and violates rules prohibiting the use of manipulative and deceptive practices in selling securities.

Promises of high returns

Investment schemes that promise high returns often prey on people's fear of equity market volatility and their dissatisfaction with the returns from bank fixed deposits. The greed for 'easy' money can overpower financial wisdom, attracting investors to flashy schemes and promises of impossible returns.

These schemes exploit the human tendency to be lured by the promise of "high returns" in a short period. They manipulate investors by creating a false sense of urgency, such as claiming that the investment window will soon close, and they will "lose out" on a lucrative opportunity. The schemes also encourage investors to bring their friends and family on board, creating a network of potential victims.

The promise of "guaranteed" significant returns in a short time, often with vague or complicated investment strategies, can be enticing, especially when coupled with social pressure and endorsements from friends, family, or celebrities. The fear of missing out on a profitable opportunity can lead people to make impulsive decisions without conducting proper due diligence.

It is important for investors to be vigilant and educate themselves about the dangers and signs of Ponzi schemes. They should verify the credibility and legitimacy of the scheme operators, regulators, and auditors. Asking critical questions, such as understanding the risks involved and the investment strategy, is essential before investing. Diversifying one's portfolio and maintaining realistic expectations can also help protect against falling for these schemes.

Social media influence

The rise of social media has had a profound impact on investment decisions, with platforms such as Twitter, Facebook, Instagram, and TikTok becoming sources of financial advice and tips for many individuals, especially the younger generation. This influence is only expected to grow over time, and investors must be cautious when using information from these platforms. Here are some key points to consider regarding the impact of social media on investments:

Ease of Access and Quick Information

Social media provides a quick and easy way to communicate ideas, thoughts, and information about investments. The convenience of mobile apps allows individuals to access investment information anytime, anywhere. This has led to a shift from traditional sources of investment advice, such as newspapers and financial advisors, to social media platforms.

Influence of Influencers

The term "finfluencers" refers to social media influencers who provide financial and investment advice to their followers. These individuals or companies have a significant impact on their audience's decisions. For example, a tweet from Elon Musk about Bitcoin caused its value to rise by 20%. However, it is important to note that not all finfluencers have the necessary financial accreditations, and their advice may not always be reliable or in the best interests of their followers.

Peer Influence and Social Connection

Social media platforms facilitate connections and allow users to seek advice from friends and family. According to a study, 84% of investors trust recommendations from peers over other forms of advertising. This social aspect of investing motivates individuals to invest, especially those who want to connect with others or feel a sense of belonging.

Scams and Misinformation

While social media can provide valuable investment insights, it is also prone to scams and misinformation. Fraudsters may use flashy offers and aggressive promotional tactics to lure individuals into get-rich-quick schemes. Additionally, social media may share modelled investment strategies that may not work for everyone, as the concept of 'one size fits all' does not apply to investments.

Investor Behaviour and Decision-Making

Social media usage has been linked to investor behaviour and decision-making. Younger investors with less experience are more likely to be influenced by social media when considering certain stocks. They may also be more susceptible to impulsive spending and trading, as influenced by social media trends.

Investor Education and Financial Literacy

Social media plays a role in passing investment education to a wider audience, especially younger investors who prefer easily accessible and engaging content. However, it is important for individuals to conduct their own research and due diligence rather than solely relying on social media tips.

Frequently asked questions