There are few areas of functioning where skepticism is more important than how one invests his lifetime savings. Yet intelligent, enlightened and educated people, some of them being naive about finance and others being quite knowledgeable, have been ruined by schemes that turned out to be highly dubious and quite often fraudulent.
The most drammatic example of this in Ghanaian history is the recent announcement that NAM 1, a highly regarded successful businessman, has for these years been running a very sophisticated investment scheme has defrauded wealthy investors, and Ghanaians are now busily discussing its disaster.
Prior to the collapse of Menzgold, l did several publications on the illegality of this scheme, l analysed a number of similar financial scams, along with a great number of other forms of human gullibility.
Analysts are emphasising that greed propels people to behave in a manner which exposes them to severe and predictable risks. Investors of Menzgold have lost a good chunk of money, through his scheme, investment mania and fraud, based on exploitation of investor gullibility.
All investment scams, including Menzgold are conspicuously fraudulent, where invested money is pocketed by the schemer and investors who wish to redeem their money are actually paid out of the proceeds from new investors.
As long as new investments are expanding at a healthy rate, the schemer is able to keep the fraud going. Once the investments begin to contract, as through a run on the company, then the house of cards quickly collapses.
That is what has happened with NAM 1’s Menzgold when too many investors, needing cash because of Ghana’s recent financial meltdown, tried to redeem their investments. Menzgold could not meet these demands and the scam was exposed.
NAM 1 came up with his investment scam of promising huge returns, of not less than 84% p.a. supposedly based on an arbitrage plan involving gold trading. The profits allegedly came from higher returns on their gold vaults.
The ensued craze has revealed that NAM 1 has pocketed many millions of Ghana cedis, most from the poor, unsophisticated and enlightened investors. The scheme has collapsed at a time the Ghanaian populace began to question the legality of its activities.
The basic mechanism explaining the success of investment scams is the tendency of humans to model their actions, especially when dealing with matters they don’t fully understand, on the behaviour of other humans.
This mechanism is termed “irrational exuberance”. Simply stated, the fact that so many people seem to be making big profits on their investments with Menzgold, and telling others about their good fortune, makes the scheme seem safe and too good to pass up.
The fact that others have made a lot of money appeared to many investors as the most persuasive evidence in support of the investment story associated with the scheme.
Meanwhile, such an evidence outweighs even the most carefully reasoned argument against the story. All investments do craze people even ones that are not fraudulent.
A form of investment fraud that has structural similarities to an investment scam is an inheritance, in which a purported heir to a huge fortune is asking for a short term investment in order to clear up some legal difficulties involving the inheritance.
In investment scams, other factors such as psychopathology or extreme naivety, likely explain the gullible behaviour, as seen in a profile of such a highly trusting victim.
Why did some people fall prey to Menzgold‘s investment scam while others did not? Out of people’s gullibility, they went ahead with a socially or physically risky behaviour in spite of the danger signs or unresolved questions, which should have been a source of concern for these actors.
Obviously, individuals differ in weights affecting any given gullible act. It is believed that certain factors contributed to most decisions to invest with Menzgold, in some cases personality should be given more weight while in other cases emotions should be given more weight, and so on. Even, a well-educated and relatively intelligent people and experts of gullibility and financial scams have fallen prey to a hustler called NAM 1.
Every gullible act occurs in a particular micro-context, in which an individual is presented with a social challenge that he has to solve. In the case of a financial decision the challenge is typically whether to agree to an investment decision that is being presented benign but that may pose severe risks or otherwise not be in one’s best interest.
A non-social situational aspect that contributed to a gullible investment decision was, paradoxically, that Menzgold promised modest rather than spectacular gains. Sophisticated investors would have been highly suspicious of a promise of gains as those promised almost 100 years earlier by Charles Ponzi. Thus, a big part of NAM 1`s success came from his recognition that wealthy investors were looking for small but steady returns, high enough to be attractive but not so high as to arouse suspicion.
This was certainly one of the things that attracted investors to investment scams, as they looked for a non-volatile investment to enable them preserve and gradually build wealth. It is safe to assume that deficiencies in knowledge and clear thinking are often implicated in a gullible act.
One can have a high intelligent quotient and still prove gullible. Some people of average and above average intelligence fail to use their intelligence fully or efficiently when addressing everyday decisions. There is also a vast dichotomy between intelligence and rationality.
The pump that drives irrational decisions is the use of intuitive, impulsive and non-reflective cognitive styles, often driven by emotions. Others too, the decision to invest in an investment scam is reflected by profound ignorance of finance and somewhat indolent unwillingness to remedy that ignorance.
To get around your lack of financial knowledge and indolent cognitive style around finance, there is the urgent need to adopt a heuristic of identifying more financially knowledgeable advisors and trusting in their judgement and recommendations.
Gullibility is sometimes equated with trust, however, not all highly trusting people are gullible. The key to survival in a country filled with crooks and fakers who are themselves gulls, is to know when to be trusting and when not to trust people.
A nice and handsome person in pictures with high level personalities is not usually a good basis for taking a decision that could jeopardize one‘s financial security. Trust and niceness are accompanied by an occasional tendency towards risk-taking and impulsive decision-making and personality traits that can also get one into trouble.
Emotion enters into virtually every gullible act. In the case of investment in an investment scam, the emotion that motivates gullible behaviour is a strong wish to increase and protect one’s wealth.
In some individuals, this undoubtedly takes the form of greed, truly greedy individuals would like higher returns on their investments and this could direct one‘s investment decisions.
These investors are often excited not by the prospect of striking it rich but by the prospect of having found an investment that promises the opportunity to build and maintain enough wealth.
A big time victim of Menzgold put it well when she told me that, she should have purchased Treasury Bills and played it safer for less returns.
In conclusion, a related problem is that the most catastrophic examples of gullibility, such as losing one‘s life savings in a scam, are low frequency behaviours that may happen once or twice in one‘s lifetime.
So should one feel pity or blame towards those who were insufficiently skeptical about NAM 1 and his scheme? A problem here is that the lie perpetrated by NAM 1 was not all that obvious or easy to be recognised.
Virtually all the investors who turned their hard-earned money over to NAM 1 would have laughed and identified it as a scam if the investment had been a Nigerian investment inheritance or the chance to own an estate house in Virginia.
Being non-gullible ultimately boils down to one‘s ability to recognise hidden risks inherent in some investments. Some risks are more hidden and trickier to recognise than others.
Very few people possess the knowledge or inclination to perform an in-depth analysis of every investment opportunity they are considering. It is for this reason that we rely on experienced Chartered Accountants to help make investment decisions.