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In a World Where Common Sense is a Rare Commodity, What’s Going on?

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Investment scams involve promises of big payouts, quick money or guaranteed high returns. In this part of the world where I live and work, investment scams in the forms of Ponzi and pyramid schemes are getting increasingly common.

Ladies and gentlemen, investment scammers are so convincing. You know who they are actually targeting. Have you lost your job because of COVID-19? Are you desperate for money? Are you a victim of one scam and looking to recover your lost money? With so much debt, what are you going to do?

According to Investopedia, with Ponzi schemes, investors give money to a portfolio manager. Then, when they want their money back, they are paid out with the incoming funds contributed by later investors. With a pyramid scheme, the initial schemer recruits other investors who in turn recruit other investors and so on. Late-joining investors pay the person who recruited them for the right to participate or perhaps sell a certain product.

Over the years, even highly intelligent and educated people who do not understand how things work have been ruined by investment schemes that turned out to be fraudulent. Unbelievable?

All investment scams will eventually collapse. There were cases where the company disappeared with investor funds, or scammers claiming to be “fund managers”, advertising in the social media, collecting money from people, without any proper fund structures. This is all very concerning, because it creates a poor image for the industry in general.

Some of these pitches are so convincing that even I take a look from time to time and the entry cost levels are so low. It is time to give myself a slap. What have I been smoking all these years? I must have been one of the biggest idiots in the world not knowing that making money can be that easy.

Sweet! Some people know what they are doing. Over the years, I have come across people who do not mind investing in any investment scams as long as they are giving them high returns. I have heard before of people quitting their proper jobs or businesses to focus on their investment scams. They took the “bait”, got their capital back and recruited others to join the gravy train. There is no feeling of guilt, no responsibility involved whatsoever for them.

They will compromise moral values and ethics for money. They always look for loopholes to overcome the rules and regulations that have been put into place to protect the system. This is how terribly low our modern society has become. Yeah, not everyone can be rich. Why should not everyone be able to earn money so, so, and so easily? 

As long as any investment scams which claims to invest or trade in anything from forex to cryptos are expanding at a healthy rate, their “fund managers” are able to keep the fraud going. Once investments begin to contract, then the house of cards collapses.

A fake investment can go on for months or even years as long as it is able to suck in more investors or suckers. You will be able to see the profits you have made on a webpage or an app.

According to Dr. Stephen Greenspan, the University of Connecticut psychology professor who is also an internationally known authority on Ponzi schemes, the basic mechanism explaining the success of Ponzi schemes is the tendency of humans to model their actions (especially when dealing with matters they do not fully understand) on the behavior of other humans.

This mechanism has been termed “irrational exuberance,” a phrase attributed to former Federal Reserve’s chairman Alan Greenspan (no relation), but actually coined by another economist, Robert J. Schiller. Schiller employs a social psychological explanation that he terms the “feedback loop theory of investor bubbles.”

The fact that so many people seem to be making big profits on the investment, and telling others about their good fortune, makes the investment seem safe and too good to pass up. In Schiller’s words, the fact “that others have made a lot of money appears to many people as the most persuasive evidence in support of the investment story associated with the Ponzi scheme.

While social feedback loops are an obvious contributor to understanding the success of Ponzi and other mass financial manias, there are four factors which can be used to understand acts of gullibility and also other forms of what Dr. Stephen terms as “foolish action.” The factors are situation, cognition, personality and emotion. Obviously, individuals differ in the weights affecting any given gullible act.

Situations. Assuming that the decision to proceed would be a very risky and thus foolish act, a gullible behavior is more likely to occur if the social and other situational pressures are strong and less likely to occur if the social and other situational pressures are weak, or balanced by countervailing pressures (such as having wise heads to warn you).

Cognition. Gullibility can be considered as a form of stupidity, so it is safe to assume that deficiencies in knowledge and/or clear thinking often are implicated in a gullible act. By terming this factor “cognition” rather than intelligence, one can have a high IQ and still prove gullible.

Personality. Gullibility is sometimes equated with trust and niceness leading to impulsive decision-making, but the late psychologist Julian Rotter showed that not all highly trusting people are gullible.

Emotion. Emotion enters into virtually every gullible act. In the case of investment in a Ponzi scheme, the emotion that motivates gullible behavior is a strong wish to increase and protect one’s wealth.

About the author

YH Wong has over two decades of experience in the financial services industry. His clients include high net worth investors and boutique institutions such as family offices and investment partnerships in the region. He is currently a senior partner with Satori Consultancy Ltd, a financial services company regulated by the Mauritian Financial Services Commission. He can be reached at yhwong@satoriconsultancy.com.

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