Years ago, I sold 25 shares of Apple stock for $28 per share. I bought low and sold high, so I was thrilled with my $700 windfall.
After I sold my shares, the stock split twice. The first split was 2-1, meaning my 25 shares would have turned into 50 shares. The second stock split was 7-1, meaning my 50 shares would have turned into 350 shares. Apple stock is currently trading around $120, meaning that my 350 shares would now be worth about $42,000. Selling that stock for $700 still haunts me to this day.
This type of regret can tempt some people to fall for schemes that promise high “Apple-like” returns for early investors.
This week’s television episode of American Greed highlights the unethical behavior of Kevin Trudeau, who made millions through infomercials and get-rich-quick schemes. Individuals regretting their missed opportunities can sometimes be easy targets for these types of con artists.
However, with so many ways to research the credibility of business ventures, some American Greed viewers indicated that they are baffled as to why some people still fall for these scams.
To understand why people ignore risks in these situations, it is important to understand the psychology behind their behavior.
There are multiple factors that influence people to sign up for these scams. However, in this article, I am focusing specifically on social consensus because it is one of the most commonly used tactics.
The concept of social consensus allows scammers to pressure their victims into signing up for these schemes, by demonstrating how foolish it would be to miss out on earnings that so many other investors are already receiving.
In fact, this pressure is even more substantial when the existing investors are your relatives or close friends. Your relationship with these existing investors can be manipulated when unethical people create an illusion of positive results.
In some scenarios, individuals initially receive favorable results. These results are not sustainable, but they last long enough for the initial investors to spread the word that others can receive similar returns on their investments (before realizing they are being scammed).
Although we may generally be skeptical of get-rich-quick schemes, when a close friend or relative is already participating and profiting, we trust the opportunity more and are fearful of the regret we might feel if we pass up a profitable opportunity. This social consensus manipulation tactic takes advantage of those emotions and causes us to lower our aversion to risk.
It is unfortunate this sometimes happens, but I encourage readers to use professional skepticism when evaluating opportunities. Avoid making impulse decisions that could harm your personal or professional well-being. Don’t let your regrets about prior business mistakes cause you or your business to walk into a financial trap. Also, never under estimate the power of good research on an opportunity and/or company. With the Internet at our finger tips, it is easier than ever to learn about scams before engaging in them.
Most business people behave in an ethical manner, so I’m not sharing this message to imply that people who present you with business opportunities should not be trusted. I share this message because the few individuals who employ these unethical manipulation tactics can take advantage of many people at once. Dialogue and education around this topic can help prevent others from becoming victims. Together, we can work together to protect the public from these types of business ventures.
Always remember, Leadership is a Lifestyle.
— Ryan W. Hirsch
Operations Manager, NASBA Center for the Public Trust (CPT)