The Securities Exchange Commission (SEC) has only just released its public advice against dishonest acts including the pyramid and Ponzi investment schemes. Herding  is also increasingly alarming in the Philippines.

According to the data from the SEC, the fraudulent investment schemes have victimized thousands of people with at least 80 billion pesos of total money taken, typically from the payment for retirees, for the past 20 years.

Now, the question is why? Why are these scams still proliferating despite many public warnings, advice, and exposés?

One answer could be found in the behavior and mentality of the people of this country. It is called the herd mentality. This Behavioral Economics principle is the behavior where a person tends to follow the decision or the action of the majority or the “herd.” This might be the cause why people are falling for the wrong financial decisions. Some other factors also contribute to this.

The first thing is conformity. This is the social pressure to follow what is normal in the society. Filipinos are prone to this mentality because of their natural sociable behavior. They want to have a sense of belonging rather than being alone. This tendency of mimicking others can result in failure in recognizing investment scams.

The second one is the belief that the decision of the majority is, most of the time, correct. The persons, who are more likely to follow this idea (especially if they have little knowledge about investment), usually do it because they think it is much safer and faster to rake in profits.

When fraud victims decide, they often look at the situation one-sidedly. This behavior is called confirmation bias. This is what supports the herd mentality and increases the appeal of the investment scams. It drives the investors of the scams to sell the investment schemes with pleasure as if they are sales agents.

Social media is a great contributor to the herd mentality because it makes it easier for people to form groups and write testimonies and false information to strengthen the belief in the crowd. With this kind of strategy, it will be more tempting to invest on those investment scams because they will appear to be more trustworthy with proofs of high profits.

Some Facebook Groups give an outright list of stock recommendations. Some say that they do not give stock tips but what they do is the exact opposite of what they preach.

It’s easy to spot “gurus” who promote the Behavioral Economics principle of herding. If the “guru” is spoonfeeding people with stock codes, you should start asking yourself, “Am I not just being fooled by this person’s smartness, educational background, and sincere-sounding Facebook posts so I would easily follow his or her lead?”

So, how to avoid and shake off this kind of mentality to prevent being fooled in those fraudulent acts?

Don’t follow the bandwagon. Find a mentor or a trade and support service provider who will teach you how to trade and invest independently.

When the mentor or service provider teaches people how to trade and invest independently, you know that that person or business is not just after their mentees’ membership fee.

Why?

Think about it. Legit mentors and service providers surely know that many people are craving for get-rich-quick stock tips. What makes these people legit is that they decided not to take advantage of people’s laziness, irresponsibility, and lack of maturity in decision-making. They know they’re not going to get the attention of stock-tip hunters but they still choose to pursue their principle-driven advocacy to teach independence in making investment decisions.

Do your research. Look for various sources and not just the social media. Finally, be rational despite the overflowing emotions you are feeling when making decisions.

As far as we are concerned here in the Stock Signals Philippines, our purpose is to make sure that you are disciplined with your stock investment decisions, organized with your trade and investment setups, and knowledgeable with why you do what you do and how you do it. We will teach you how to be independent and profitable in your trade and investment decisions.

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