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?
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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.
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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)
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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.
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