Survey of Washington State Investors

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Survey of Washington State Investors
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Study ofWashington Investors

• Survey of 258 randomly-selected investors from
  the general population and 125 known victims of
  investment fraud in February, 2007
• Participants were asked a standard battery of
  financial literacy and behavioral questions and
  also questions that sought to gauge their
  persuasion literacy how well they can spot
  statements used by con men

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Financial Literacy Questions

• Over a 40-year period, which do you think gave
  the highest return? Bonds, Stocks, Bank savings
  account, IRA, No answer
• Correct answer STOCKS

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Financial Literacy Questions

• With compound interest, you earn interest on the
  interest as well as the principle. True/False
• Correct answer TRUE

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Financial Literacy Questions

• When an investor diversifies his or her
  investments, does the risk of losing money
  decrease, increase or stay the same?
• Correct answer DECREASE

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Financial Literacy Questions

• Mutual funds pay a guaranteed rate of return.
  True/False
• Correct answer FALSE

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Financial Literacy Questions

• Which of the following statements best describes
  a no-load mutual fund It carries no fees It
  carries no sales charges It is not high risk It
  has no time limits regarding buying and selling
• Correct answer It carries no sales charges

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Financial Literacy Questions

• What happens to bond prices when interest rates
  go up? Do bond prices fall, remain the same or
  go up?
• Correct answer FALL

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Findings Financial Literacy Questions

• Based on overall average, respondents failed the
  financial literacy test
• Overall respondents answered 52.7 of the 6
  financial literacy questions correctly
• The general population scored 50.9 victims
  scored 56.3

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Perception of financial safety-net

• Which of the following agencies insures consumers
  against losses in the stock market FDIC, NASD,
  SEC, SIPC, DFI, All of the above, None of the
  above?
• Correct answer NONE OF THE ABOVE

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Perception of financial safety-net

• Fewer victims than non-victims understand that
  there is no safety-net insuring against losses in
  the stock market.

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Victims vs. Non-VictimsFinancial Literacy

• Victims of investment fraud scored higher overall
  on the financial literacy questions than
  non-victims
• Victims of investment fraud are more likely to
  believe they have a safety-net when investing in
  the stock market

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Persuasion Literacy Questions

• Background on Persuasion Literacy
• Past research has shown that con men use a
  selection of persuasion tactics to convince
  individuals to fall for their scams
• Past research also found that victims score
  higher on financial literacy. This led to the
  hypothesis that they may know about investing,
  but they do not know about persuasion
• A series of four red flag questions examined
  persuasion literacy

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Study of Washington Investors

• What kinds of statements are used by con artists?

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Persuasion Literacy Questions

• After hearing each statement, participants were
  asked to rate each one on a scale of 1 to 7,
  where 1 means the statement would not make you
  interested to hear more, and 7 means it would
  make you extremely interested to hear more

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Persuasion Literacy Questions

• The lowest return you could possibly get on this
  investment is 50 annually, but most investors
  are making upwards of 110 a year

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Persuasion Literacy Questions

• This investment made hundreds of people extremely
  wealthy

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Persuasion Literacy Questions

• There is no way to lose on this investment- it is
  fully secured

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Persuasion Literacy Questions

• We only have three units left on this one if you
  dont make a decision today, you wont be able to
  get in on this investment opportunity

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Persuasion Literacy Questions
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Persuasion Literacy Questions

• Victims significantly more interested in 3 of the
  4 red flag statements
• Suggests victims more vulnerable to classic con
  man pitch statements than general population
• Both groups most interested in statement that
  promised high annual return
• Both groups suspicious of statement using
  scarcity and urgency

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Openness to Sales Pitches

• A series of four additional questions gauged
  interest in general sales pitches which did not
  include traditional persuasion tactics these are
  referred to as green flag statements
• Respondents rated these statements on the same
  scale as the previous statements

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Openness to Pitches

• Green Flag Statements
• I am a registered broker with the NASD
• This investment product is registered with the
  SEC and your state security agency
• This investment is for a company with excellent
  management and in a high growth industry
• This stock has outperformed the Dow Jones
  Industrial Average each year for the last 5 years

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Openness to Pitches

• Overall interest in Green Flag statements

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Openness to Pitches

• Overall interest in all statements

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Openness to Pitches

• Victims were more likely than non-victims to have
  attended a free informational seminar.

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Interest in Investing Information

• Victims were more likely than non-victims to have
  attended a free informational seminar to learn
  about investing in general.

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Openness to Pitches

• Overall, victims more interested in all sales
  pitches, both red flag and green flag
• This suggests they are more open to sales pitches
  in general
• Both groups more interested in green flag
  statements than red flag statements
• Victims more likely to attend a free
  informational seminar about investing

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Trust in financial services providers

• Respondents unlikely to check the background of
  financial services providers to see if they are
  licensed or if they have broken laws related to
  their profession

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Trust in financial services providers

• Victims were more likely than non-victims to say
  they didnt check backgrounds because they
  trusted their broker.

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World View on Making Money

• More victims than non-victims believe there is
  an easy way to make money that only a select
  few have access to.

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Demographic ProfileVictims vs. Non-Victims

• Victims are more likely to be
• Male

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Demographic ProfileVictims vs. Non-Victims

• Victims are more likely to be
• Married

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Demographic ProfileVictims vs. Non-Victims

• Victims are more likely to be
• Make more than 35,000 per year

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Profile of Victims vs. Non-Victims

• Previous studies showed victims were more likely
  to
• Have a college degree
• Have experienced more negative life events in the
  past three years.
• Current survey did not replicate these findings

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Overall Profile of Victims vs. Non-Victims

• Victims
• Score higher on financial literacy than
  non-victims
• Score lower on persuasion literacy than
  non-victims

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Financial Literacy Vs. Persuasion Literacy
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Overall Profile of Victims vs. Non-Victims

• Victims
• Are more open to sales pitches
• Are more likely to believe there is a
  safety-net when investing
• Are more likely to believe there are a select few
  who make money the easy way
• Are more likely to be
• Male
• Married
• Make more than 35,000 per year