Identifying an investment scam is not always easy. Scam artists are skilled in persuasion and they often know just what to say to attract investors. You need to understand the common persuasion tactics they use, so that you can avoid becoming a victim of investment fraud.
The FINRA Investor Education Foundation, AARP, Washington Department of Financial Institutions and the Florida Office of Financial Regulation partnered to train others on how to prevent investment fraud. In the document, Outsmarting Investment Fraud, these organizations outlined the common persuasion tactics used by scam artists, which are as follows:
- Phantom Riches: This tactic involves “dangling the prospect of wealth.” People are lured into this type of scam, because of the promise of a big payoff or high rate of return.
- Source Credibility: People are more apt to trust someone who appears to have authority. The representative might use some type of special designation or degree to build trust.
- Social Consensus: The idea is if there is a high demand, it must be a good investment.
- Reciprocity: An example of this tactic, which was provided in Outsmarting Investment Fraud, would be – “I’ll give you a break on my commission if you buy what I am recommending for you – half off.” Basically, it is doing a small favor in exchange for a bigger one.
- Scarcity: This is one of the basics of economics. When something is scarce, it has a higher perceived value. Fraudsters lead investors to believe that opportunity is limited.
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