The Psychology Behind A Scam

The Psychology Behind A Scam

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From Ponzi schemes to pump and dumps, stock fraud runs rampant in this country. Many fraudsters make their money by dazzling unsuspecting investors with false promises of hitting it big. The old adage “if it’s too good to be true, it probably is” certainly applies here. Fraudsters are masters of persuasion, custom tailoring their pitches to fit perfectly with the psychological profiles of their targets, says FINRA.

Once they know your weakness, they’ll hit you with a blast of influence tactics that can boggle the mind. They plant the seed and let it grow, leaving even the most skeptical investor wondering “what if”? Awareness is key, so let’s go over some of the more common tactics employed by stock fraud artists.

  • Phantom Riches: The brilliance of this tactic lies in its ability to dazzle you with the possibility of wealth, with fraudsters dangling a carrot that you can’t help but want. You’ll be promised guarantees upon guarantees – something, by the way, no reputable broker would do. No opportunity is risk free or guaranteed to return anything!
  • Social Consensus: This tactic preys on your natural inclination to follow the crowd. “Everybody’s doing it” isn’t just something your teen says when he wants to go to an underage drinking party. We all fall victim to this in our everyday lives, and fraudsters know this. “Yeah, it’s a lot of money but get in now and it’ll pay off in spades. My buddies are all in, and even my mom wants in! Do you really want to see everyone profit from this and you’re left behind?”
  • Source Credibility: Building credibility through the association of a reputable firm or by boasting special credentials, fraudsters are playing into your need to trust in something proven, reliable and reputable. After all, would a senior vice president of a major firm on Wall Street sell you anything less?
  • Reciprocity: When someone offers you a break or deal if you buy now, like half off the price, consider this a red flag. There are no deals in real life.Period. Steer clear of this “do me a favor and I’ll do you a favor” mentality.
  • Scarcity: By telling you there’s a limited supply, the fraudster iscreating a false sense of urgency. It’s the same tactics retailers use, claiming “limited supply: buy now or miss out!”

Be on the lookout for these red flags:

Unregistered products: Unlicensed “brokers” often sell unregistered securities, such as stocks, bonds, oil or gas deals, hedge funds and notes.

Guarantees: As said above, be leery of anyone that guarantees big riches or overly consistent returns regardless of market conditions.

Complex strategies: Anyone touting a highly complex investment technique for out-of-the-ordinary success should be taken with a grain of salt. This is one example why you should always take the time to do your research on any investment you’re presented with.

Zero documentation: Stocks without stock symbols…missing documentations…no offering circulars for bonds…these are all signs that your broker may be selling unregistered securities.

One way to combat becoming a victim against such fraudsters is to have FINRA lawyers in your corner.