It’s a shocking statistic. According to industrial psychologist, Paul Babiak and criminal psychologist, Robert D. Hare, about one percent of men are bona fide psychopaths.* The authors of Snakes in Suits, When Psychopaths Go to Work say most psychopaths aren’t Hannibal Lecter-types. Unlike the killer in Silence of the Lambs, most of them don’t stuff people in their freezers. But they lack empathy for other people.
Some leave social carnage in their wake. They might be married, yet sleep with multiple women without feelings of remorse. Others scale corporate ladders without caring about the hands they crush while climbing to the top. Others steal people’s money–without a shred of guilt.
In 2017, Maria Konnikova published the New York Times bestseller, The Confidence Game: Why We Fall for It…Every Time. It’s one of the most fascinating books I’ve ever read, showing (among other things) how almost anyone can fall for a Ponzi scheme. These are fraudulent investment schemes that promise high investment returns for little or no risk. But such profits aren’t real.
Plenty of people remember Bernie Madoff. He ran an exclusive fund that promised returns of 12 percent per year. To generate new clients, he used a persuasive technique that Robert Cialdini refers to as scarcity. In his book, Influence: The Psychology of Persuasion,Cialdini says scarcity can be used to make something seem rare or special. For example, Madoff turned away many wannabe investors. This increased his fund’s aura of exclusivity–which attracted even more people in search of easy gains.
Bernie Madoff’s fund didn’t report a single losing year–until the floor caved in. In 2008, plenty of his investors tried to cash in their profits. The financial crisis spooked some, forcing them to sell. Others had lost their jobs and needed quick cash. But the money wasn’t there. Madoff was using the proceeds from investors’ new deposits to pay the investors who withdrew. That’s how a Ponzi scheme works. But the funds ran dry because the “profits” weren’t real, so now Bernie lives in jail.
Some Ponzi schemes are well disguised. This year, even Warren Buffett’s firm, Berkshire Hathaway reportedly lost $377 million in a Ponzi-like scheme. Other Ponzi schemes are far more obvious. “The really obvious ones target unsophisticated investors,” says Sam Instone, CEO of the overseas investment firm, AES International. “They offer ridiculously high returns without the possibility of a loss.” Such promises don’t sound realistic. But as Instone says, “If one person naively signs up and sees the profits that they’re making, they’re going to tell others.” In reality, new investors are just giving their proceeds to earlier investors. That’s why the profits aren’t real.
One of my friends (I’ll call him John) almost fell for one last week. John emailed me to say, “A friend of mine is a fund manager. He has offered me a great investment opportunity that’s based in Mauritius. It has done really well over the past 18 months. He has a special formula to ensure no monthly losses. And he’s targeting returns of about 30 percent per year.”
John isn’t foolish–but he’s human. And that’s what makes him (and almost everybody else) susceptible to a con. But let’s back up to discuss Finance 101.
The fund’s prospectus, which you can read for yourself here, is littered with spelling errors, and the claims are gibberish. But note the part that I bolded below:
“The system is designed to reduce monthly returns [sic] volatilities [sic] with the primary objective of reducing monthly drawdowns to zero (ie no losing months)”
Savings accounts and CDs offer no monthly losses. But they pay paltry interest. When a product offers no monthly losses AND investment returns of 30 percent per year, that’s like saying, “We sell refrigerators that can fly you to New Zealand.”
Here’s some perspective: Apple’s stock is one of the greatest success stories of all time. According to Morningstar, its stock has averaged a compound annual return of 17 percent since its IPO in 1980. Berkshire Hathaway might be the most remarkable stock performer in history. According to Warren Buffett’s 2019 letter to shareholders, it averaged a compound annual return of 20.5 percent between 1965 and 2019. In other words, John’s friend says he’ll beat two of history’s best-performing stocks. To top that feat, he says he’ll do it without a single losing month.
Under most circumstances, John would have laughed at the guy who tried to sell this opportunity. But Maria Konnikova says professional cons have highly seductive power. They often build their victim’s trust. They look successful. They sound successful. And they use Scialdini’s Scarcity to make their grift seem legit.
Professional cons cultivate relationships for weeks, months, sometimes even years before they strike. That’s what John’s friend did. I believe that Paul Babiak and Robert D. Hare would say that John’s friend is a bona fide psychopath. Fortunately, John has decided not to invest in this fund. But others will fall victim. Like the saying goes, if it sounds too good to be true…it’s just another flying fridge.
*Note: Interestingly, Babiak and Hare claim that the percentage of women psychopaths are dramatically lower than men.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacherand Millionaire Expat: How To Build Wealth Living Overseas