How Gullible Are You for Financial Scams?

How gullible are you? Have you been burnt by investing in a financial scam?

The newspapers in "Malaysia - Truly Asia" have highlighted, in the last few years, of people being cheated by the infamous "Nigerian email scam". This is based on paying a fee (1%?) so that you can get a very generous share (40%) of a $5 million inheritance. Or variations of the million-dollar figure. The Nigerian diplomatic mission have had to make announcements in the local media, to inform that this sort of email 'offerings' is actually a scam.

Those who have lost their shirts in the Nigerian email scam have been labeled as being driven by greed. Of wanting to get easy money. I am sure you have received such emails. You still have your shirt, so you are awesome!

My university classmate puts his money in a 'gold investment program'. He says he gets 2.5% returns per month. 30% per annum? A few of my friends and I have not invested in that program. Is it because we are not gullible? Or is it because we are ignorant? You tell me?

I know a few guys who invest in a 'property investment program'. They make 20-30% annual returns on investment. Would you join these guys?

I was told that you can invest $20,000 in another 'property investment program', which takes advantage of the U.S.A.'s sub-prime loan crisis. Your return would be $300 a month. That is $3,600 a year. 18% annual return on investment? Would you put your money in this opportunity?

Many investors have got burnt in the stock market in the year 2008. Do you think they have been cheated? Or do you think they were gullible by investing in the stock market? Ermmm ... quite tough questions?

Stephen Greenspan, emeritus professor of educational psychology at the University of Connecticut, explored how investors continue to be swindled. How he also lost money in Madoff's alleged Ponzi scheme.

In his explanatory model, Prof. Greenspan says that there are four factors which help explain acts of gullibility. The four factors are situation, cognition, personality, and emotion.

Situation occurs when you are presented with a social challenge that you have to solve. Do you believe that the investment proposal presented to you is benign, or unsafe (dangerous)? You may be pressured by social influence to be gullible (especially in Ponzi schemes, when the earlier investors have recouped their investments, and made profits).

How can you overcome this social pressure problem? By not having friends? No. Just have your own mind. Do not try to please others.

Seek advice and more information from others, especially the experts and successful investors with a proven track record. No need to re-invent the wheel. Follow the path set by the successful investors.

Cognition (or intelligence?) is deficient when you make a stupid decision (such as investing in a scam). Normally intelligent people will make defective decisions when based on intuition and impulse, frequently driven by emotion.

So, the way to avoid scams is to make rational, non-impulsive, and reflective decisions. In short: "Stay cool, man!".

Your Personality trait, that may make you a gullible person, is normally associated with your trust in others. Trusting others, such as your best friend, is good. But sometimes your best friend may not have the intelligence (or cognitive skill) to differentiate a scam from a genuine investment.

So, what to do? There's a saying, "Trust, but only 99%". What's the 1% for? For you to do your homework. To check it out. Because at the end of the day, you are responsible for your results. Not your best friend.

Emotion is the crucial factor, to see whether you are gullible or not. Emotion could be because of excitement, at finding a better investment. In the Nigerian email scam, it would undoubtedly be greed (40%, not of your long lost favourite uncle's, but of a complete stranger's, $5 million inheritance!).

How can you learn to be unemotional? Learn that you can't get something for nothing! If it's too good to be true, it is most likely that.

The moral of the story? The divide between being gullible and being ignorant, is not that clear. Perhaps Robert Kiyosaki says it best, "Know the difference between Risk and the Risky".

He wrote, "I often hear people saying. 'Investing is risky'.
"I disagree. Instead I say, 'Being uneducated is risky'".
For Robert Kiyosaki, if you want to be a successful investor, get educated in financial intelligence.

I wish you Sucess in your undertakings and Good Health and Wealth to you and your family. Take care!

P.S. After writing the above, the newspapers reported that India's fourth largest software company Satyam Computer Services went into a financial quagmire, after its founder and chairman reportedly fudged figures to the tune of $1 billion over 5 years. To show $1 billion in the company's accounts - when it does not exist - is it creative accounting? Or a notch better - magical accounting? Your comment?

But the more critical question is, how are you going to avoid such fraud, if you were an investor? Your comment?

P.P.S. On 02.02.2009, I received a special internet invitation from my best friend (whom I have never met before) Brigadier General Kamalu Chimson to share with him a $12.5 million fund (25% for me, and 75% for him!). I did not realise that there is a kind man from Africa who would like to make my life a living heaven on earth. I must be a good boy to deserve this God-given opportunity. I may not have time to write this blog again ... sorry ... I need to go shopping for a Lotus Elise immediately. You too have a great time, ok?