The reasons why people lose their money are as varied and diverse as the individuals themselves. Yet, there are many common ways in which we can lose our precious wealth. This article aims to examine some of these ways and highlight how our emotions, a lack of knowledge and socioeconomic cultural norms all play a part in depleting our savings. We will soon realize that the common suspects range all the way from obvious scams to a problem that is as pervasive as it is insidious. But let’s begin first with the obvious scams.
* Scams
When the word “scam” is mentioned, many will undoubtedly be confronted with a momentary image of Nigeria due to its notorious reputation. Indeed, there are plenty of scams that originate from that nation [1] and yet financial deception has been around long before Nigeria ever existed. Versions of the Ponzi schemes and other “get rich quickly” plans are well and alive in various forms throughout the world.
Unfortunately, it is often the middle class and working class that are the victims of such unscrupulous conmen (or conwomen). They are the ones who have relatively little financial knowledge. When faced with the possibility of acquiring a fortune, some of them let their emotions get the better of them. Truly, the perpetrators of the scams are often counting on this exact reaction by preying on our innate desire for a better future.
The situation is especially sad when the criminals use their victims’ own compassion against them. The conman typically does this by pretending to be in a plight and asking for donations or he could simply act as a legitimate collector of donations for an established organization such as a church or a charity. Another more wretched ploy involves luring the victim (often a woman) into a romantic relationship with the singular purpose of later grossly betraying that trust and running away with some of her money. This happens in many countries especially affluent ones like Singapore and Malaysia [2].
Many of such encounters begin with an online relationship. Indeed, the internet is the new haven for financial frauds of all kinds and it is not only the gullible who have lost their money to outright scams. While the current generation of internet surfers are more aware, the cyber-conmen themselves are also refining and innovating their traps. Yet, for all their wiles, scams are still illegal and as such, they cannot operate lawfully unlike the next category of financial sinkholes.
* Dubious Investments
Before we begin, let us consider how Warren Buffett views his investments especially as it pertains to stocks. In his view [3], purchasing a stock is a very similar activity to buying a share of a business. Indeed, that is exactly the underlying principle of stocks and shares. The shareholder profits as the business grows and prospers. Such profits then, are nothing but an echo of the normal and rightful rewards of the entrepreneur except that it does not require a huge investment in time.
It is unfortunate that the presence of scams and exotic financial devices have polarized many of us into the two distinct camps. On one hand, there are those who have fallen prey to the aforementioned scams. Many will feel disillusioned with financial promises or potential of any kind and may come to group investments as yet another category as scams. Of course, the other extreme involves those who invest in a way that may be closer to gambling than real investing. This group tends to speculate heavily and devote plenty of time to “technical analysis”, often without any real success. Some of them may then go on to brag about their supposed winnings (in reality, usually nonexistent) and coax the gullible to part with their own money in order to learn his or her “financial secrets to quick millions”.
Ironically, both sides of the camp share more similarities than differences in this author’s opinion. Both of them are using emotional judgment rather than considering investments as they truly are. It is not only the disillusioned who lack solid knowledge about financial investments. Those who speculate heavily are also often culprits of not having or applying sound principles of financial investments. For instance, one of the most fundamental rule of investment is to invest only what you can afford to lose. Yet, the presence of contra, margins or options allow a person to “invest” money that they may not even currently possess. It is partially for this reason that the rampant manic-depressive economic cycles of the stock markets exist. Not only that, it aggravates the financial situations of many when a recession occur or when the economic bubble burst (recall the dotcom bust).
In the current age, we must also make mention of two popular “investments”. The first is the Multi-Level Marketing (MLM) phenomenon. In theory, it makes perfect sense and yet the way it is currently practiced makes it closer to being a scam [4] than a legitimate investment. The primary reason why it’s closer to a scam is that too little emphasis is placed on the product as members are joining not because they like the product, but because they want to get rich. A few “retail MLMs” do exist which bring great value to their members and distributors. Simply put, such MLMs either function as giving massive discounts to loyal distributors cum customers or they resemble traditional direct selling paradigms where the line between distributors and customers are well differentiated. Sadly though, as mentioned above, such MLMs are rare and the majority are inherently flawed systems akin to negative sum games.
Speaking of negative sum games, Forex is one in which countless millions are engrossed and enamored with. Although many who engage in it are speculators, it is similar to MLM in that the primary motivators are greed and emotional thinking. Some advocates of day trading may argue here that it is not wholly based on luck but this is missing the point. A negative sum game is one in which the net value to the participants is negative. The direct result of this is that a participant’s profit is directly a result of an even greater loss to another participant. Without delving too deeply on the mathematics, logical or ethical nuances of the Forex system, it is sufficient to say that the system should not be viewed as an investment device. A few niches such as the “carry trade” and position trading exist that has some utility, but for the most part, Forex is a system that is almost an online 24 hour casino where the gamblers are steadily losing money under the pretext of “investing”. (See [5] for a relatively unbiased and technical understanding of the game theory implications of the system).
* The Insidious Problem
The previous two topics have affected the lives of millions of individuals and will no doubt continue to do so. Still, for all their ruses, they do not permeate society in the way which this particular insidious problem does. What exactly is this strange problem?
It is something which cannot be named outright since it is woven into the fabric of society and is intricately linked with how the American Dream (or your national/cultural equivalent) has turned into the American Nightmare. The Insidious Problem worms its way into our collective living rooms whenever we are greeted with a TV advertisement that tells us why we *need* a certain product to make our lives perfect. We feed the problem when we try to keep up with the proverbial “Jones” next door who may themselves be living a difficult life behind the facade of materialistic trappings.
Consider the way in which our cultures teach us that borrowing money is not only acceptable, but it is a norm or perhaps even praiseworthy. Never mind the Subprime Crisis or the insidiously accumulating (and compounding) credit card bills. Interestingly, most of us do not even understand the mathematics behind our credit card debt due to the nature in which it is devised. Of course, our youths are probably too engrossed with the latest trivial amusements to really engage in the “silly” pursuit of knowledge, including and especially financial knowledge.
After all, it seems only right to echo the National Trade Deficit… right? Should we feel too stressed out or unhappy, then the mass media will simply tell us to take Retail Therapy as cure. The astute reader will easily see the sad cycle that that particular cure will create.
But of course, Free Market Forces, Keynesian Demand Economics and Capitalism are the Holy Trinity that has an unquestioned virtue in many countries around the world. It’s true that by themselves, they do describe many of our economic and spending behaviors… Yet, there is something profoundly wrong when entire populations are living on borrowed money to fuel Consumerism. It’s a place where everyone wants to be larger than life and be capitalized. (Kudos to the reader that realizes the multi-layered meaning of that last sentence, especially the last word).
When the social norm is to preach unlimited success, beauty, wealth… etc… we know that there is something amiss. How can people *not* lose their money easily? Even the most discerning are not immune to the culture they are living in. Add in the pressures of modern life (as mentioned earlier) and it’s amazing that people don’t lose as much money as they could have!
*Conclusion
We have seen how emotions, socioeconomic cultural norms and a lack of knowledge predisposes a person to losing money through a variety of means. Certainly, this article has only covered the surface of how and why people lose the money in the ways they do, but I hope that at least a glimpse into the topic was shared.
* References:
1) A Culture of Corruption: Everyday Deception and Popular Discontent in Nigeria by Daniel Jordon Smith
2) Singapore Crime Watch series of 2009 to 2011
3) http://www.buffettsecrets.com/buffett-investment-principles.htm
4) http://www.mlmwatch.org/01General/10lies.html
5) http://blog.currensee.com/2009/01/game-theory-is-forex-a-zero-sum-game/