Why we fall for investment scams

Our need to believe in miracles and magic makes us susceptible to tricksters.

Listen to Maya discussing this topic on Classic FM with Tamara LePine Williams

investment scamsI was recently watching the Carbonaro Effect, a TV show where a magician plays practical tricks on the public. In this particular episode, Michael Carbonaro is impersonating a shop assistant in a toy store, and as customers come to the till, he demonstrates some amazing toys.

In one demonstration he turns a clay frog into a real frog by adding water, and in another a sticker of a fish comes alive when added to a fish bowl. He also manages to blow glass bubbles from a children’s bubble bottle.

The stunned customers immediately purchase these demonstrated items, even arguing over who gets the last box – because of course he always tells them that these are the last items available.

None of them question what they are seeing right in front of their eyes. They saw it happen, so it must be true. One sceptical woman did ask to blow the bubbles herself, so Carbonaro handed the bottle over and made a quick escape.

No doubt the episode edited out those people who saw right through the tricks, but there were sufficient believers to make for amusing television.

This struck a chord with me, because it is exactly what happens when it comes to investment scams. People so badly want to believe in easy money that they are willing to believe in the impossible.

Why did the individuals in that toy store so quickly believe that a sticker could actually turn into a fish?

Firstly, they were not expecting a magic trick. They believed Carbonara was just a shop assistant, so they weren’t watching out for skulduggery.  Secondly, they clearly have no comprehension of science and why it really would be impossible for a paper fish to come alive. And finally, I think that inherently we all believe in miracles, that there is more to this world than we really understand – the very principles of religion and prayer are based on this belief.

The same applies to investment scams. Often you are introduced to them via a friend who has made money, or claims to have made money, out of the scheme. If it was just some random person knocking on the door and had a shifty look in their eyes, we would be a lot less likely to invite them into our home, let alone give them money.

Then there is the fact that many people do not understand how money works – why a pyramid scheme is simply not viable, why simple maths would show that it will implode; why any rate of return above that of interest paid by a bank would inherently carry risk; and that just because a passive investment business has lots of complex spreadsheets, it doesn’t mean it’s a legitimate investment.

And finally, there is a belief that we deserve better and that maybe this time our guardian angel is smiling down on us and we are one of the very lucky few who will be blessed with the knowledge of this amazing scheme that will turn us into millionaires. It is this belief that can make us blind to the obvious.

So if you don’t want to fall victim to one of the hundreds of scams out there remember:

People lie for gain: Don’t believe everything you hear or read – especially on social media. Testimonials can be invented or paid for. Pictures can be taken next to helicopters or fancy cars – it doesn’t mean they are actually owned.

You are not stupid: If you do not understand exactly how the scheme makes money, it’s not because you are stupid, it’s because there is nothing to understand. Keep asking questions and if the answers sound vague or if you are put under pressure to “Buy now”, simply walk away.

Get-rich schemes are not miraculous: Miracles may exist, but not in get-rich-quick schemes, unless of course you are the person selling the scheme. Unfortunately, many scammers use religion and prayer to convince people of their “honesty”. Just because someone can quote verses of the bible or claim to be religious, doesn’t mean they are.

How to spot a scam:

  • It is not widely advertised on mass media platforms. It relies mostly on word of mouth, and usually uses a few people as “bait”. The early investors receive “too good to be true” returns and then convince other people to join.
  • The returns promised are always well above what you would expect from a conventional investment, but when the investment returns do not materalise, there is always some clause in the documents that says “these are projected and not guaranteed” even though it was sold as a guaranteed or low-risk investment.
  • It is not registered with the Financial Services Board or the South African Reserve Bank, and is not an authorised financial services provider. Promoters or brokers are not registered with the Financial Services Board as qualified brokers.
  • The initiators are not accountable to anybody and can disappear at any time.
  • The schemes do not have a corporate organisational structure (CEO, Directors)

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