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How Investment Scams Work

Why Do Investment Scams Work?
William Fogwell and his investment firm, Hobbs-Melville, swindled investors of more than $150 million.
William Fogwell and his investment firm, Hobbs-Melville, swindled investors of more than $150 million.

Cons rely on basic principles of human behavior for their schemes to succeed.


Most people are afraid to take risks. How much are you willing to gamble on a high-stakes poker game? What are your chances versus your possible profit?

Con artists know you're afraid of risk. They'll tell you there is little or no risk in an opportunity that could yield untold riches. If there's no risk, why not jump on in?


Most people have a tendency to believe that the grass really is greener on the other side of the fence. "If only I knew how to get past the fence," you say, gazing longingly at that new sports car or the pile of gold coins. Con artists are greedy, for sure, but, more importantly, they know that you are greedy, too. They know they can mesmerize you with promises of great riches and future security.

Urgency and Scarcity

"Act now and you'll receiveā€¦"

"Memorial Day Weekend Sale."

"Clearance Sale -- Sunday Only!"

An important principle of sales is the limited-time, limited-supply offer: urgency and scarcity. Con artists use urgency and scarcity to lure their victims quickly, before the victims have a chance to do any research or background checks on the legitimacy of the investment opportunity.

"There's only room for a few more investors," Mr. Jones says. "If you don't give me a check today, I can't guarantee you any share of the profits."

You don't want to miss the train to the greener side. And the greener side is where the train is headed, right? Mr. Jones said so [source: National Futures Association].


When a friend kindly offers to cook you dinner, and past experience has shown that he can't tell a skillet from a spatula, what do you say? You don't want to hurt your friend's feelings, after all.

Unfortunately, your fear of hurting someone's feelings works to a scammer's advantage. Yes, you're unsure about investing in this beachfront property in Montana, but Mr. Jones is such a nice young man. And he did drive all the way out to your house to talk to you, not to mention comp your ticket to the investment seminar.


When you go to a play, and one of the actresses doesn't know her lines, you lose confidence in the actress's character. You cease to believe.

The same principle applies to the confidence man. People tend to trust a person who seems to know what he's talking about and has full confidence in his plan. After all, not only are our emotions swayed by confidence and charisma, we are taught to trust experts. And if you tell a con artist, "No, I'm not investing," the con won't reply, "You're right. You got me." The con will say, "Well, I'll just take the opportunity to someone who is interested in making money." And you start to rethink your decision.

How can you spot a scheme? How do you know if you're already the victim of a scam? Send me your bank account number, and then go to the next page.