Why We Fall - The Psychology of "Yes"
Avoiding Scams at the Holidays: Part of a Six-Part Meyer Wilson Blog Series
A simple question about human behavior underlies much of what I do each day as an investment fraud attorney: Why will we drive across town to save a few dollars at a sale on sweaters, but give our life savings over to an investment opportunity that ends as a scam?
It seems counterintuitive, right? We research the sale; perhaps analyze how much money we can save over time; maybe buy in bulk. We get a great deal on sweaters, and we're happy. But sometimes we don't apply the same due diligence to our investment research. We invest a lot, and we lose big when we find out it's a fraud.
Why do we do it?
The complex answer lies in psychology. As authors and researchers have noted over time, computers don't commit fraud—people do. We can pass all the corporate legislation we want to regulate the actions of big companies and brokerage firms, but in the end, people will manipulate laws written by other people. It's all about the human brain, which dictates our behaviors.
Looking closer at the sweater example, it's actually not counterintuitive at all. We buy the sweaters because we're enticed to "save money". Retailers use marketing tactics targeted at the confidence centers in our brains—it's likely that somewhere inside our minds, we know that the sweaters were marked up before they were marked down and we're not really saving that much. But the marketers have made us feel good about ourselves. We got a deal! Our confidence soars.
Con artists who perpetrate investment fraud do the same thing. The "con" in the term "con artist" actually stands for "confidence"—and for a reason. Scam artists boost our confidence and our brains release doses of serotonin, a chemical that essentially shuts down the brain's ability to think critically and gives us a sense of well-being. Con artists—even people you might know and trust and have a long-term relationship with—might say things like:
- "Since you're such a savvy investor, I wanted to let you know about an opportunity that other people are going to miss." (Makes you feel intelligent; above-average)
- "You're one of only a few people I'm telling about this chance to earn huge returns." (Makes you feel chosen; special)
- "You owe yourself this chance to live well in your retirement." (Makes you feel you've worked hard all your life and this will be your reward)
All of us from young to old and at any level of education can fall prey psychologically to confidence-boosting persuasive tactics, no matter how well we think we can spot a scammer. Con artists are adept at manipulating our emotions, because that's how they succeed. In the 2011 Marketplace online article, "Why Even Smart People Fall for Scams", a researcher said this:
[W]e have found in our research in interviewing con men  that they all say they're trying to do the same thing to the victim. And that is get them under the ether. What do we mean by ether? Ether is a heightened emotional state where you're excited to make a lot of money or there's some other reason why they can get you off-balance. And making a decision based on emotion. And one con man said, 'I get them into the heights of ether. If they've dropped to the valley of logic, then I've lost them.'
Just like the marketers who take us into the "ether" with the enticing offer of the sale sweater—I saved so much money!—investment fraudsters do the very same thing.
There are a lot of other emotional pieces that come into play when we're a fraud victim. We trusted someone and thus had a false sense of security. We're desperate for a way to get past our financial crisis. We're attracted to financial gain. We're not always rational. In essence, we're only human.
This holiday season, both sweater sales and investment scams will abound. But before turning your hard-earned money over for either, step back and remove yourself from your emotion. Take time to think. Fall from the ether to logic, and you'll go a long way toward keeping your money safe.
Common "Red-flag" Sales Pitches
Avoiding Scams at the Holidays: Part Three of a Six-Part Meyer Wilson Blog Series
Has your financial adviser, or a friend, or someone on the Internet via e-mail or social media offered you an investment opportunity this holiday season?
If so, have you heard or read anything like this?
- "This stock has made incredible gains!"
- "We're talking about an investment opportunity that has virtually no risk."
- "You cannot lose your initial investment."
- "The lowest return you could possibly get on this investment is 20% annually."
- "This stock has outperformed the Dow Jones Industrial Average each year for the last ten."
- "This is a chance to get in first with a company like Apple. I'm doing it now!"
The fraud research branches of both FINRA and the SEC report that statements like these are among the most-used tactics to get investors to turn over their hard-earned and hard-saved money for various investment scams. Fraudsters spend considerable amounts of time honing scripts and practicing pitches to woo potential investors. None of them are true.
Here is a sample sales pitch used by FINRA surveying investors about fraud scams last year:
My friends informed me about a very reliable high-yield investment program I've been extremely impressed with. The program pays from 2% to 3.4% daily depending on the investment plan you choose. The minimum term of investment is 180 days, after which you can either recover the sum of your initial investment or continue further. You can also invest on a compound basis and get huge returns. It guarantees the safety of the invested amount and even pays a 5% referral commission.
Every sentence in this pitch is a red flag. There's no such thing as a "high-yield investment program." People less averse to risk can choose to invest in the stock market and perhaps earn a high yield in an up market or upon selling stock at a high stock price, but it's not anywhere close to guaranteed. High yields can happen, but they're never guaranteed and only come with significant risk. Beware of words that guarantee not only a specified return, but a return of your initial investment. Sometimes these scams are Ponzi schemes, where money is collected from new investors to pay off previous ones—and there's no investment at all. When you ask for your money back, there's often none left.
Another fraudulent sales pitch:
We are a XYZ Co., a well-known and profitable investment management company specializing in real estate, business startups, high-yield stocks [and long laundry list of other investments]. We'd like to share with you our revolutionary investment system that is incorporating short-term and long-term investments into an around-the-clock profit-generating machine.
Red flags in this pitch include the touting of the company's performance and the unique investment program. Investors should always research a company before investing through it, even if the company has been used for years by a trusted friend or family member—and especially if you've never heard of it.
And truly, there is no "revolutionary" investment system that exists in the world of finance. Successful investments are a combined function of research, asset allocation, timing, and perseverance through the ups and downs of the market.
For more examples of fraudulent sales pitches, visit FINRA; read this fantastic investor alert from the SEC; and listen to this shocking "Audio Life Sales Pitches (MP3)" [scroll to very bottom].
There's Never a "Free Lunch"
Avoiding Scams at the Holidays: Part Two of a Six-Part Meyer Wilson Blog Series
It's the giving time of year. Spirits run high; twinkling lights appear all around us; cards flood our mailbox. Among them, we find a brightly-colored invitation from Smith & Co. brokerage firm or insurance agency to a country club or nice hotel for a "free lunch in appreciation of being a loyal client" or "an exclusive, catered event" to introduce a "select few—like you!" to an opportunity that's "already slipping away."
We'd all love to eat a nice meal that we don't have to cook or buy, but it's never free. The firm has already paid for the three-color marketing piece, the country club or hotel conference room, and lunches for the people they hope show up. They want to get that money back and make money, and they plan to do it by selling us what we thought we'd never buy. They're very skilled at persuasion, and more often than not, they do sell us something at our "free lunch."
In economic theory, "there's no such thing as a free lunch" means that we never get something for nothing. Whenever goods and services are provided, someone has to pay for them. The phrase is as old as it is true—in the U.S. in the middle 1800s, tavern owners announced free lunches served at noon. The hook was that the customer had to buy a lunch's worth of liquor before they could eat.
Investment scam artists regularly use these types of ploys to entice investors to hand over a large sum of money for the newest and best investment that's "guaranteed" (a red-flag word if used by an adviser or salesperson) to make us money. Last year, the Financial Industry Regulatory Association "FINRA" published research that found that 64% of polled investors had been invited to an "educational" investment meeting that turned out to be a sales pitch for a potentially fraudulent offer.
According to a different survey by the FINRA Investor Education Foundation, four out of five investors over age 60 got at least one invitation to a free investment seminar in the past three years. As I explained during a news interview, since most of these "free lunch" seminars are nothing more than opportunity to sell complicated investment or insurance products, if you are someone that may be susceptible to high-pressure sales techniques (if you don't like to say "no"), then stay home and avoid the event altogether. Otherwise, it may be the most expensive lunch you have ever bought.
The results of these "education" seminars can be disastrous, which is why both FINRA and AARP have in-depth resources for investors to educate themselves on the tactic.
"Free lunch" offers can appear in other forms, too:
- An e-mail from another country requesting a small deposit in exchange for a large amount of money.
- An offer for a small purchase of a penny stock in anticipation of a large, guaranteed return.
- A letter from another country announcing the recipient won a "lottery" and including what looks like a cashier's check for an initial payment.
- An offer to participate with a group in a private hedge or other fund as opposed to a public fund, with a small initial investment and promised higher returns.
It's easy to make a snap decision during the holidays when excitement runs high and there's cheer all around. Beware any offer for a "free lunch" and never invest your money on the spot or without doing the research in advance about the investment and the person selling you the investment.
Other resources from Investment Fraud Attorney David Meyer regarding the "free lunch" sales tactics to watch out for:
How can I find out whether an investment seminar is legitimate or a scam?
Is There Ever Really Such a Thing As a "Free Lunch"?
Don't Become a Victim of a "Free Lunch" Seminar Scam
Avoiding Scams During the Holidays: Part One of a Six-Part Meyer Wilson Blog Series
The Wolf is Always at the Door—Especially at Christmas
The holiday season is approaching, and with the excitement of giving comes an increased risk of being taken—as a victim of an investment scam. Scammers are constantly honing their skills and tactics and use them with abandon during the holiday season.
Ironically, scheduled for release this Christmas, December 25, 2013, is the movie, "The Wolf of Wall Street". It stars Leonardo DiCaprio as Jordan Belfort, the New York stock swindler convicted of securities fraud crimes in 2004. He served 22 months in federal prison for stealing from investors and was ordered to pay restitution of $110 million dollars.
How did he do it? Belfort was a master of the art of persuasion. He started a brokerage firm and hired salespeople to convince potential investors to buy the firm's penny stocks. His main tool was a script he created for his salespeople to use in cold calls. The callers dialed a number from a phone bank, recited Belfort's finely-crafted script, and sold millions of penny stocks to investors who never saw a dime in return. Jordan and his company made millions scamming people who were 1) attracted by the low-risk the "penny stock" idea projected, and 2) hoodwinked by Jordan's persuasive tactics.
Most scam artists are masters of persuasion. Persuasive tactics can fool anyone from the least sophisticated investor to the most sophisticated. In the work we do at Meyer Wilson, we've seen many such tactics used on individuals who've fallen prey to Ponzi schemes and other investment scams.
Beware this holiday season of the following persuasive statements scammers use in phone calls, in-person solicitations, emails, and mobile messages:
- "We Have a Hot Tip for You." There's no such thing as a "hot tip," or an "exclusive deal" that's only being offered to a select group that happens to include you. Never, ever, hand over your hard-earned money in response to a "hot tip."
- "I Made This Same Investment." [For me; my mom; my grandma.] This sounds persuasive (which is why cheaters say it) but there is no way to verify it and it is most always false.
- "We Talked Last November." Ignore this. This tactic is often used to confuse elderly investors who might be dealing with memory issues.
- "Simple Bank Savings Earn So Little Interest." If you have bank savings or CDs, you probably have it there because you are adverse to risk, which is a good thing. Don't take it out to hand over to a stranger for a promised better return. That's what Belfort did with the penny stocks.
- "We Can Buy Low and Sell High." If it was that easy everyone would be doing it. Nobody has the magic answers. Brokers can face steep penalties for making any guarantees whatsoever about stock market performance. Do not believe any statements about guaranteed returns of any kind.
Also avoid giving any personal or investment information to someone who 1) uses your first name as if they know you; 2) uses a brokerage firm name you've never heard of; 3) asks you how much you can start investing with; or 4) tells you the salespeople only earn a minimum commission.