Investors with these mental models are immune to investment scams This is the model that will offer you immunity from fraud
Dhirendra Kumar
CEO, Value Research
While browsing podcasts about financial fraud recently, I came across the tale of a British woman, Juliette d’Souza. Between 1998 and 2010, she befriended and swindled many rich people in the UK. As with most successful fraudsters, her victims believed her and gave her their money willingly. She apparently made away with 5-10 million pounds and valuable properties, including four flats in London. In 2015, she was indicted for duping 11 people and jailed for 10 years. As an individual pulling tricks on other individuals, this is impressive, but is loose change compared to masters of the game like Sam Bankman-Fried of FTX. His victims believed him and gave him money willingly, but he managed to leverage crypto madness and the Internet to pull off his trick on an industrial scale. However, I do feel that when it comes to the psychology of individual victims, d’Souza’s case is more interesting and instructive. When someone falls prey to global fraud like crypto or even the current digital startup racket, there’s an excuse that millions of others fell for it as well. Mass delusion means that the individual is influenced by the logic that if so many people are doing it, and the media as well as the financial industry are supporting it, then it must be genuine or worth exploring.
However, individual frauds follow a different logic. D’Souza claimed supernatural or other-worldly powers and got people to pay for all her personal, financial and other-worldly success. In each case, that has now become public, the victims ended up believing her lies that were completely outside the realm of any reasonable framework of reality. Most of the victims were successful and prosperous enough to be targeted as victims by d’Souza. In their professional and business lives, they were competent people, who appeared to understand how the world works and could deal with it quite well. They had what one might call an accurate model of reality.
Yet, when faced with the con, they proved to be gullible beyond measure. Their belief and understanding of how the world worked was not deep and resolute enough. Many successful people feel their success is a fluke and there is some other secret to getting through life. That’s their mental model or framework of how things work. When it comes to investing, I have long observed that most people have different models. The most common one that people follow is this: ‘There are people who know when a stock’s price is about to rise. If one of them tells me, I can make money.’ This is the ‘tip’ model of stock markets. This isn’t so much a mental model, as the lack of one. Unfortunately, this is very common. There seem to be a lot of people who believe that someone knows which way things will move, and everything depends on getting to know these secrets.
A little more broadbased than the ‘tip’ model is the ‘operator’ model. According to this model, people believe that there are ‘operators’, or those who manipulate stocks. All one needs to do, they believe, is to figure out what the operators are doing and then manage to ride the stock while these people are pushing it. This model is realistic. Outside the big, high-volume tickers, many stocks are routinely manipulated by the so-called ‘operators’, at least in the short term. However, this model is useful only for the operators themselves. If you are not an operator, you are at a considerable risk of giving away your money to one.
There is, of course, yet another model. This one is about observing how much the companies earn, estimating how much they will earn in the future, how they will compete, and things like that. Compared to the two previously mentioned models, few seem to believe in this one. There are many frauds being perpetrated in the investment world, but the people with one of these mental models are immune to these cons. Guess which is the model that gives you immunity from fraud.
(The author is CEO, VALUE RESEARCH.)
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(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
