Home / Opinion / Online-views /  ‘You’re not a loser, the scheme is for you’

I’m between meetings and while away time at a Barista near IIT. The book I have open is less interesting than the conversation I shamelessly eavesdrop on. Didn’t have to try very hard as the two men who sat less than two feet away are locked up in a world of their own. One seems to be the person with the scheme. The other sounds like the person who will go and sell that scheme. Twenty minutes of hearing high energy hectoring, approach lines, counter questions and a very basic but effective sales pitch and I reluctantly leave the free theatre. These men are obviously practicing a pyramid scheme and person one is prepping person two. The thread that runs through person one’s rant at person two and then of person two to the victim he calls on the phone is this: you’re a loser if you carry on with your low-level life as it is now. You want the big bucks? The good life? To be in the fast lane? Then you need to jump into this scheme. It is only for you. I am your special friend. There is a small window of opportunity open. It will shut. Remember that person? How useless he used to be? Well, now he’s in Mumbai. Drinks everyday at five star bars. And you can’t even afford this coffee you drink that I bought you. Hurry up and sign on.

A variant of this technique has been used for as long as I can remember to scam people. It used to be eucalyptus trees; it then became emus, now goats. The originators of the scams rarely get caught and usually resurface in some other part of the country with yet another scheme. But with the arrest of the promoters of Stock Guru India, there may be some learning from how two people could defraud so many for so long. Stock Guru India investors were sold a dream that promised a 20% return a month for six months and principal return in the seventh month. 1 lakh invested would throw off 1.2 lakh over six months or an annualized return of over 600%. Looks impossible, but when the bait was offered, over 200,000 investors in seven Indian states took it, only to lose 1,100 crore of their money.

Why do so many of us fall prey to scams? Scamsters, it seems, are masters at pressing our emotional buttons. A superb piece of research (http://goo.gl/cBdav ) titled The psychology of scams: Provoking and committing errors of judgement prepared for the UK Office of Fair Trading by the University of Exeter School of Psychology documents that scams play on basic human desires and needs such as greed, fear and the desire to be liked. A key finding was that most victims kept the decision to invest private and would not discuss it even with trusted family members and friends. “It was almost as if with some part of their minds, they knew that what they were doing was unwise, and they feared the confirmation of that that another person would have offered. Indeed to some extent they hide their response to the scam from their more rational selves." Another finding was that after the first connect had been made, the victim is usually drawn in with small incremental steps. Loss aversion, or the desire not to book a loss or accept failure, makes most people keep going with the payments in the hope of recovering their full money. The famous Nigerian scam is a textbook case of such a process.

While it is easy to blame the regulators, the government and everybody else, a part of the blame must rest on the people who buy into these schemes. The UK study documents victims who said that they did not know how to evaluate if the scheme was a scam or not. One easy way to not fall in a money trap is to close your ears totally to a pitch that sounds outlandish, because once they have your attention, it is difficult to break out of the web the scamsters spin. The easiest way is to not listen to them at all. Not open an email that promises anything where the pay-off is much bigger than the effort or the return is very large compared with what you can get through a boring fixed deposit. It is good to remember this often: if the returns look too big, they are a trap. Anytime anybody offers you a return that makes your interest quicken, treat it as a red flag. The large benefit number is bait, and once you are hooked, the rest is a process. Another way to see the trap is when you get pushed for a decision. If there is a closing window of investment, it is a trap. Have a cool-off period for yourself that you will not decide on the investment without discussing it with at least two people you trust. There is an old bania (the third caste that represents the vaishya or trader class) saying that I’ve heard bandied about the extended family that goes something like this: Bania chitthi bhi che din le kar ghoomta hai, or roughly translated, it means that a prudent man carries even a letter around for six days before posting it.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com

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