The Psychology of Investment Fraud

Everyone has heard the adage, “If it sounds too good to be true, it probably is.” But what makes people susceptible to investment fraud?

Researchers have identified several factors that make people more likely to fall victim. This article will examine how these factors work together to create a perfect storm of scamming opportunities for con artists.


A fraudster’s ability to manipulate a victim’s guilt can be particularly effective. They often portray themselves as compassionate and caring. They may also use false credentials to bolster their credibility. For example, they might claim they’re registered with a reputable agency. Scam artists also exploit the halo effect, wherein investors believe that likable people are trustworthy and credible.

The fraudsters sell worthless stocks, mutual funds, or even ones that don’t exist. They then convince the victims to invest more money by showing them fictitious reports on how well their investments are performing. They also promise that the value of the securities will continue to increase, usually citing some news event or recent discovery (such as new technology or a gold mine).

Fraudsters may also target victims with common traits such as age, ethnicity, religion, or social and financial networks. This is known as affinity fraud. They’ll try to win the trust of a group leader and persuade the rest of the group to invest.

Once victims have invested time, money, and energy into a fraudulent scheme, they’re less likely to stop supporting even if they suspect it’s a scam. This is because they’re motivated to maintain their professional and economic status. Fraudsters use this principle to exploit the “sunk cost fallacy,” a psychological phenomenon that makes people reluctant to withdraw an investment even if it hasn’t paid off yet.


Many investment fraud schemes exploit the desire to get rich quickly. Fraudsters are fast-talking and persuasive, often convincing their victims to invest money before they can test an opportunity or consider whether it is legitimate. They may also use the appearance of authority to bolster their offer. For example, they may claim to be bank-backed or work with prestigious companies. They might even create fake seals and other documents that can give them the credibility of a regulated institution.

In addition, some victims feel compelled to act because they believe the fraudster is honest and trustworthy. This is known as the rationalizing bias, which can lead to a loss of self-control. A victim might be unable to resist the temptation to invest more money or time into an offer, and they might ignore warning signs, such as a lack of return on their investment.

Investors need to understand how fraudulent investment offers can manipulate them. Knowing the psychology behind investment fraud, they can learn to recognize potential scams. Investors should also be aware of their rights as crime victims and seek help from an appropriate investment loss attorney. If you feel like you have been involved in a scam you can call your local law enforcement agency to create a case. Federal and state laws are designed to protect investor victims.


Researchers have found that fraudsters target individuals who lack self-control. They may use social media, dating apps, or Internet ads to pitch a fraudulent investment scheme that promises quick riches. Victims may be asked to invest in digital currencies or buy real estate. Newer scams include pyramid schemes and fake celebrity endorsements. The FBI reports that investors should look for warning signs such as the swindler’s refusal to return phone calls or correspondence or their failure to send a prospectus before investing. Swindlers also often insist that specifics are “too technical” for laypeople to understand or are classified as confidential.

Some victims of investment fraud are impulsive and easily persuaded, while others are skeptical and reflective. They may decide to test an offer or take the time to think about it before cooperating with fraudsters. Additionally, they may be aware of past impulsive decisions that resulted in unfavorable outcomes.

Other psychological factors influencing the willingness to invest in fraudulent schemes include gullibility, risk tolerance, and character traits. In addition, some individuals are influenced by the desire to maintain their economic status and social standing. These individuals are more likely to invest in fraudulent schemes that involve large amounts of money, and they may be more willing to falsify information or recruit family members, friends, and acquaintances (Frankel 2012).

Another factor is the victim’s level of cooperation with the offender. Some victims do not report the crime because they feel that it is not their responsibility to alert authorities or they are afraid of retaliation from the offender.


In investment fraud, the fraudster tries to convince investors that their offer is legitimate by claiming authority. They may show them impressive offices and letterheads or claim a reputable bank backs them. They also use the halo effect technique to convince victims that the positive character traits of the person selling them the investment apply to the assets themselves. The fraudster may even create fake seals for fabricated regulatory agencies to give the impression that a credible authority accredits them.

In addition, the fraudster tries to appeal to victims’ emotions, such as empathy or greed. For example, they might tell their victim that other investors are getting rich and encourage the victim to invest so they can share in the profits. They also might use a joint group of people, such as age, ethnicity, or religion, as bait to get more victims.

Many of the victims are educated and employed. They have small savings and often rely on the recommendation of friends or family members to invest in financial schemes. Moreover, in developing countries like China, Nigeria, and Latin America, there is herd behavior, whereby the victim follows others to become a part of the group that invested in fraudulent programs. In this case, naivety, lack of empathy, and greed are the main factors in their participation in the fraud.s