Fishing, But You’re the Fish
I will quote a story from Panchatantra, an ancient Indian collection of animal fables in Sanskrit from 200 BCE. The story titled: “The Three Fishes”.
Once upon a time, in a pond, there lived three big fishes. They were best friends and had known each other for a long time. Even though they were very close friends, they were characteristically very different from each other.
The first fish was extremely wise and always believed in making well-informed choices. He was well-known in the pond for his knowledge.
The second fish was intelligent, resourceful, and pleasant. He constantly used his presence of mind to get out of any trouble he was in. He was well-known for his quick and clever solutions.
The third fish was opposite in nature compared to his friends. He was lazy and believed in fate. His philosophy in life was that whatever happens, happens, and no one can stop it. He did not believe in doing things and, as a result, would get into many difficulties.
Despite the differences, the three fishes were good friends and did everything together.
One sunny day, while the first fish was playing at the shore, he overheard two fishermen talking. ‘This pond is full of good fishes’, said the first man. ‘Shall we come here tomorrow with our net and catch them?’ asked the second fisherman. ‘Sure! It will be a good day!’ said the first fisherman, and both left.
The first fish was terrified on hearing this and rushed back to the pond to inform his friends.
‘Oh no! This is a big problem!’ exclaimed the second fish. ‘What do you guys think? What should we do?’ ‘I have decided to leave the pond to go to a nearby lake. I’ll come back when things get better’, said the first fish.
‘I don’t want to leave the lake’, said the second fish. ‘I will think of a way to save myself when the fishermen come’, he added.
The third fish, as usual, showed his laid-back attitude and said, ‘I have lived in this pond for a very long time, and I will not leave it at any cost. Whatever is bound to happen will happen, and I cannot change it. Let it be.’
The other two fishes tried very hard to make him understand, but all their efforts were in vain. At last, they gave up.
Later that night, the first fish left for the nearby lake.
The following day, the fishermen came and cast their net and trapped both the second and the third fish. After being in the net for some time, the second fish had an idea. He laid still and did not move at all. The fishermen noticed him and thought that he was dead.
They threw him back into the pond, and his life was saved.
The third fish, on the other hand, kept tossing and turning around in the net, not knowing what to do. His tossing and turning made the fishermen so irritated that they struck him hard in the head.
After a few days, the first fish returned to the pond, and the second fish narrated the entire incident to him.
‘Alas! Had he listened to us, he would have been with us here today’, said the first fish, and both mourned the absence of their dear friend.
The Cognitive Bias
The third fish might have reunion with its friends if it listened. This is a form of irrational mindset called Cognitive Bias.
Cognitive bias is a systematic thought process caused by the tendency of the human brain to simplify information processing through a filter of personal experience and preferences. The filtering process is a coping mechanism that enables the brain to prioritize and process large amounts of information quickly. While the mechanism is effective, its limitations can cause errors in thought.
Essentially, cognitive biases help humans find mental shortcuts to assist in the navigation of daily life but may often cause irrational interpretations or judgments.
The Ultimate Combo of Biases
In 2022, Indonesia was shocked by barrage of Ponzi schemes. Here are some famous schemes that has wiped out Investor’s wealth:
The newest one that really shocked me is?Indosurya Savings & Credit Case.?According to the Acting Deputy for Analysis and Examination of PPATK Dhanang Tri Hantono. He explained, of the Rp. 106 trillion raised, Rp. 43 trillion was circulated to 43 Indosurya Group shell companies, some of which went into private pockets, and the rest were just returned to customers.
You just read it right, Rp. 106 trillion! This is equivalent to almost USD 7 billion wipe-out in a single case. Referring to this value, it means that Indosurya is the biggest Ponzi scheme scandal in Indonesia. If the money handled well, it might have improved Indonesia’s economy.
Now let me introduce?the 4 Horseman of Apocalypse.
The example case in this story is?DNA Pro Academy, a robot trading Ponzi scheme which I remember vividly that some of my social media friends ever posted and encouraged public to join in the investment. Pretty sure those lose their money, as I don’t see any more highlighted contents on their profile (of course they deleted it). If you read this, hopefully you won’t fall for another Ponzi.
1st Phase: Conservatism Bias
According to Investopedia, Conservatism bias is where people emphasize original, pre-existing information over new data. This can make decision-makers slow to react to new, critical information and place too much weight on base rates. When it comes to business decisions, new information should be looked at carefully to determine its value.
How does this bias emerge?
The investor must go through a wide range of financial information and critically analyse before they can make any decisions. This process is time-consuming and required extra effort and patience. The problem is that whenever new information about the company comes out, the investor is supposed to perform the entire analysis again. This can be physically as well as emotionally stressful for the investor. Hence, instead of forming new opinions, the buyers simply hold on to pre-existing beliefs about the firm.
In the case of DNA, let me summarize what I’ve see in those contents that promoting the “legitimate claim” why this investment should be trusted:
With those ‘valid’ reasons, lots of investors finally decided to put their savings in DNA.
The interesting part is you can deduce directly decide this is a total scam by reading this. But why people still fall for it?
The root causes of Conservatism Bias are a lot, but the obvious cause is?Fail to Revaluate and Understand Complex Data.
Those scammers understand what’s inside of investor’s mind; blazing profits or returns. Then, they try to exploit using smoke screens like what I have described above.
Cryptocurrency and Foreign Exchange (Forex) by its nature, is a VERY volatile instrument. Now those so-called robots claimed to be able to predict how the price move. This is red flag #1.
The red flag #2 is they offer fixed return every day! To be exact, 1% per day. The funniest part is someone happened to pitch me about this stuff, and he said:
“Can you imagine? 1% per day. It will give 365% a year!”
So, I think, “Boy, if you know what is compounding interest, you won’t fall to this cheap trick.”
And that is the first Bias Combo.
2nd Phase: Herd Mentality Bias
Now this is phase 2, after investors infected by Conservatism Bias. Let me give you a short story.
During the Eid holiday, one of my friends visited Bandung with her family. I decided to bring them to Braga Street; a famous Bandung’s landmark which has European touch and ambiance. After some walk, I noticed her brother suddenly went missing. Turns out he’s on queue to buy some porridge, which the line was crowded. I wonder and ask, “Do your brother plan on to visit it before?” “Nope, he saw the line and think that it might be hype food and probably tastes nice.”
Back to the DNA case,
Investors don’t buy all that kind of visual at first (but because of the promised return, they tend to blind up the reality). Somehow, they noticed that a lot of investors also join in the ride!
“If others also trusted their money on this, it surely might be trusted!”
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This is the base thinking of disasters. As time goes, the mind will expand the thoughts:
“See? Even more people joined! This is definitely good investment.”
With addition, those investors often meetup in networking session or social event and developed cult like mentality. In scammer’s point of view, they see a gold mine.
When bad things happened, Herd Mentality Bias will be the supporting structure. Let’s say someone named A invested in and meetup with B, investor that has invested earlier than A.
A: “I don’t think the robot is getting better, the algorithm might be obsolete”
B: “Don’t worry, it will be fine. Thousands of members have invested their savings and the founders will be ‘pushed’ to improve the robot. And if bad stuff still happens, lots of people also feel the same. At least, you get a community support and together we may be strong!”
Then A feel safe because there are other people in the same boat as A.
Well, feel free to “get a community support and together we may be strong”. But you are sure be doomed if the boat is a Titanic.
3rd Phase: Optimism Bias
The third bias is the beginning of denial.
Investors who are afflicted with optimism bias often have an internal view of the markets. This means that they view the markets from their current financial and emotional situation. This is opposed to what the actual situation in the market is. A rational investor would make unbiased decisions based on market realities.
It is easy to see why this kind of thinking can be dangerous. If an investor truly believes that bad things cannot and will not happen to them, then they stop taking precautions. Since they disassociate themselves from the results of their actions, they often start making reckless decisions.
In the DNA case, Investors enjoyed around 6–8 months before the incident happened. Can you imagine what’s in their mind during month 4 or 5?
One percent per day means 3.3 times initial investment in 4 months and 4.4 times initial investment in 5 months. Best hook is you can withdraw it anytime, and here is the exact moment optimism bias entered the game.
What if I hold it for 1 year?
2 years? 3 years?
And more…
If you’re in this phase,
Congratulation, you are officially trapped in Ponzi scheme!
4th Phase: Cognitive Delusion
And the final touch, Anchoring Bias, the last of the 4 Horses of Apocalypse!
When someone reached this state, there’s no more rationality and consciousness about their reality. Sometimes we called this state of mind as Limbo.
When the balloon finally popped out, Authorities decided to freeze the withdrawal of funds from DNA. When one of the directors held in custody, he still claimed that?unpreparedness?led the system to turn into pyramid scheme.
This is where the Limbos showed up, hundreds of members begged law authorities and members of parliament. They said:
“DNA has helped our economy, please don’t block their business permit”.
Fellows, try to think critically. You can start simple; how does Ponzi or pyramid scheme execute?
Please look at this following image:
Simply said, return of early investors come from later investors capital.
If you claim the reason is unpreparedness, there’s no way the system turns into pyramid unless the management itself that led the changes.
The Conclusion
The wrath of 4 Horseman of Apocalypse have claimed around 550 billion Rupiah (around 40 million USD) with estimated 3600 Investors scammed.
What I would like to highlight is how dangerous those biases are, not the Ponzi schemes. If we somehow can manage our biases, I’m 100% sure we can avoid those scammers. In stock investing, these biases can haunt every investor even including the experienced one.
From what I observed, the fundamental root cause always comes from?ignorance.
I’d like to share an interesting question asked by one of students when I was giving lecture at Parahyangan Catholic University. She asked:
“What’s truly the objective of Investors?”
Objective of investors is for sure to grow their investments, what we called as return. But the gap that investors often missed out is, why do they have to learn or study investment?
My answer to that question is:
“Goals of Investor is to maximize return.”
“Things Investor needs to do is learn and research to minimize risk.”
If investors happened to not meet the requirements above, they are prone to biases.
Final advice,?understand the nature of instrument you invested.
Robo-trading is handling?trading?transactions in foreign exchange. This is an act of trading activities.
You want to know why I referred those who stuck in Ponzi schemes as Investors?
Investors are individuals that invested in long term to generate returns, usually they put their funds on long term instruments.
And so, what’s another name for long-term investment?
A failed short-term investment.
No pun intended.