How to Avoid the Trickiest of Investment Scams
Professor of Finance Vesa Puttonen from Aalto University School of Business and Professor H. Kent Baker from the American University Kogod School of Business co-authored a new book that educates investors by exposing investment pitfalls, and helps them act rationally.
Investment Traps Exposed: Navigating Investor Mistakes and Behavioral Biases (Emerald Publishing) provides a highly readable overview of personal financial management that is aimed at helping investors become more successful.
Investment Traps Exposed helps both investors and investment practitioners increase their awareness about the external and internal traps that they or their clients can encounter. Professors Puttonen and Baker write about the following investing traps and discuss how to avoid them.
- Trap 1: Becoming a Victim of Pyramid and Ponzi Schemes
- Trap 2: Misrepresenting Risky Products as Safe
- Trap 3: Making Unrealistic Return Expectations
- Trap 4: Falling for Mutual Fund Traps
- Trap 5: Overpaying for Products and Services
- Trap 6: Investing in Complex Products
- Trap 7: Engaging in Gambling Disguised as Investing
- Trap 8: Replaying on Unsupported Promises
The authors examine common investing mistakes, behavioral biases, and investment traps that can ensnare investors, affect sound judgment, and reduce wealth. They also explain how to recognize and avoid making investment mistakes. Many practical case studies about the traps are analysed in the book.
Financial Literacy and Scams
According to the research, even the most experienced investors can be susceptible to cons. Professor Puttonen recommends putting in the time and energy required to become more financially literate before entering the market. The book details the American Madoff scam and the Finnish Wincapita. Similar kinds of scams are revealed constantly all over the world. Professor Puttonen has opened a Twitter account @Investmenttrap where he posts investing traps that people have encountered.
All Kinds of Biases
Professor Baker explains that even if people were informed about financial matters, they are still susceptible to bias. The book examines some of the biases: cognitive, emotional, and social that can lead people to make unwise investments. With social biases, investors might latch onto the investments du jour favoured by their friends and neighbors. One form of this is herding, the groupthink that helped set off the financial crisis of 2007-2008.
The authors write about the importance of being aware of biases before making an investment. Even being cognizant of those biases will not necessarily keep people from repeating the same mistakes. Therefore, planning and forethought can help stave off negative tendencies.