Every money scam is a carefully and strategically woven trap with psychological tools employed, such that the scamster can get the better of your logical thinking and catch you off-guard, at your vulnerable best.
So if and when you land up in such an unpleasant situation, do not let your rational voice get suppressed by your emotional one and your helpless self take over. Find out the emotional triggers that fraudsters use to trick you out of your money and how you can outwit them.
1. Investing fraud: Affinity fraud
The victims are usually members of a community, or ethnic, societal, religious and close-knit groups. The fraudster finds a way to gain entry into such a group and offers investing opportunities with high or safe returns to the captive audience. To succeed, all he has to do is convince the leader or an influential member.
Psychology employed: Personalisation
As the name suggests, proximity or an emotional connect is used to gain the victim’s trust. This is done by citing a common friend or an incident involving a child or relative, and creating a false sense of closeness. Investment options are then suggested with high profit or assurance of safety. Convincing even one member of the group is enough for the rest of the group to follow suit and be duped.
How to counter it: Keep emotions at bay
No matter how close you are to a person or how trustworthy he seems, always research the company and product before parting with your hard-earned money. The investment needs to suit your needs according to your lifestage. Don’t invest because the person seems nice or is known to your friend circle.
2. Investing fraud: Internet investing
The fraudster sends e-mails from a position of authority in a trustworthy organisation like a renowned private bank, insurance or mutual fund company. He can also suggest transferring money into a better account, fund or policy, or even offer maturity proceeds of your own policy. He then demands an advance fee to facilitate the transaction and if you succumb, the con is complete.
Psychology employed: Use of authority
A mail from a senior official of a large organisation is designed to be formal and authoritative, so that the victim does not feel the need to question it and complies without objection. It is used to browbeat the target into accepting the terms and give in to the pressure of a higher power.
How to counter it: Avoid unsolicited mails
As a rule, never respond to unsolicited mails offering incredible investments, no matter how daunting the sender’s rank or how authoritative the letter’s tone. Before agreeing to the mailer’s demands, call up the bank or insurer on its registered contact number to verify the authenticity of the mail. Finally, never send money or fee to a stranger or an unverified bank account.
3. Investing fraud: Pump & dump
Among the various market-related frauds, one is ‘pump and dump’, wherein the price of a stock is artifi cially raised by fraudsters, invoking investors’ interest in it. They then sell their shares at the inflated price, reap rich profi ts and stop hyping the stock. The stock price falls drastically, resulting in losses for the investors.
Psychology employed: Scarcity or FOMO
The fear of missing out (FOMO) on a profitable stock or transaction is often witnessed as herd mentality in the stock market. Securities frauds are committed by triggering this fear and projecting a stock as a potential winner by artificially inflating its price. Other fake investment products with short expiry terms are also used to create pressure among victims to buy it at the earliest.
How to counter it: Don’t rush or panic
Never rush into any transaction regardless of how scarce the investment product or how short the timeline and the urgency to invest in it. Check the company’s history, owner’s track record, stock’s performance and reason for the sudden rise in share price. Don’t invest just because everyone else is.
4. Investing fraud: Misselling products
Banks are a fecund ground for such scams, wherein insurance is sold to unwitting customers, typically senior citizens, who are looking for an investment vehicle to park their life’s earnings. Life insurance is sold in the form of endowment or money-back plans, and Ulips, to people who don’t need it, and get very low returns.
Psychology employed: Visceral triggers
Basic instincts like greed, fear, strong need to be liked or be fi nancially secure are frequently deployed during misselling. The lure of high returns and low risk are good baits for a senior citizen wanting a secure retired life. Similarly, the assurance of guaranteed returns pulls in conservative victims who do not want to experiment.
How to counter it: Know your needs first
Try not to buy any investment product sold by a bank employee. In fact, no investment should be made on the advice of friends, colleagues, relatives or anyone who is not an expert in the field. If you are incapable of conducting a thorough research on your own before investing, seek the advice of a financial planner, even if you have to pay a fee.
5. Investing fraud: Ponzi or pyramid schemes
One of the oldest investing scams named after fraudster Charles Ponzi, the scheme promises high returns and is dependent on recruiting fresh investors to keep the plan operational. If the recruitment peters out, the dividends dry off and investors lose money.
Psychology employed: Societal pressure
Most such schemes bank not only on greed but also on the pressure to do what everyone else is doing. If most of your friends appear to be making easy money with the scheme, it is hard to resist not investing in it. These schemes often start as a secondary source of income, but easy money with minimal effort quickly forces investors to put in large sums, most of which is eventually lost.
How to counter it: Never follow the herd
Stay away from any scheme that requires you to enlist other members to earn a profit. A big red flag is the absence of any tangible product or service that is generating an income. If you can’t detect any, do not invest. Don’t put in money just because everyone you know is doing it. There is no easy, instant route to big profits.
6. Investing fraud: Hard-money lending fraud
This fraud comes into play when home buyers need large sums of money to buy a house and investors want higher than normal returns. The latter offer cash to buyers at interest rates that are higher than those offered by lending institutions. Usually there’s a mediator involved, and, importantly, no paperwork. The fraud takes place when home buyers fail to return the money. Without any legal documentation, the investor can do nothing.
Psychology employed: Overconfidence or ignorance
For a retail investor who has made large sums of money, it is easy to believe that he cannot go wrong with his investment choices. Add to it a bit of greed, and the victim is ripe to be exploited by the scamster posing as a home buyer. Ignorance about the procedures and blind faith in the mediator are also a surefi re way to be cheated out of your money.
How to counter it: Skip greed and risk
If an investment does not involve legal documentation and paperwork, it is fraught with risk, and as such should be avoided. With greed as motivation, you are bound to take unnecessary risks. There are several instruments that can help you get good returns without the risk of losing capital as well.