It is not about intelligence for those who fall for pyramid schemes

One and a half years after Kenyan pyramid scheme investors witnessed their entire savings sink in a flash, they can take consolation in the fate of their global peers who are apparently not better off.

As late as December last year, American investors were still putting their cash in Bernard L Madoff Investment Securities LLC, a Wall Street firm, until its chairman was charged the same month with perpetrating the largest investor fraud ever committed by a single individual.

With at least $50 billion (about Sh4 trillion) gone, Madoff’s scheme could be the largest investor swindle in history and one that makes our own pyramid schemes look like kindergarten stuff.

Closer home, victims of so-called pyramid schemes are still smarting from their losses, estimated at Sh20 billion from a total of about 160 schemes. And despite being heavy on promise, the Government is yet to convert rhetoric into action on the matter.

Local victims have formed an umbrella body called the National Pyramid Schemes Victims Initiative to try and regain their lost fortunes as suspected culprits continue to walk scot-free, while flaunting their ill-gotten wealth.

“Despite the losses, most of our victims are now more concerned about fighting social evil and impunity in this country than recovering the money,” said a philosophical NPSVI chief executive Joseph Kinyua during an interview at his office this week.

Legal entities

The association squarely blames the Government for their losses since the schemes operated as legal entities before being wound up.

But even as US and Kenyan investors fight for their rights with or without Government support, a huge mystery is why so many people broke a cardinal rule of investing by putting all their eggs in a single basket.

“When it comes to money and investing, investors are not always as rational as we think,” says Suntra investment Bank head of investment banking and fund management, Charles Ocholla.

The risk of over-allocating money in one position is what economists call lumpy risks. This is a dangerous over-investment in a certain sector or asset class, which means the value of your portfolio will go up and down in large swings based on the movements of the over-invested sector, he said.

According to him, behavioural finance attempts to understand and explain how human emotion influences investors in their decision-making.

“Faced with the prospect of selling a stock, investors become emotionally affected by the price at which they purchased the stock. So they avoid selling it as a way to avoid the regret of having made a bad investment as well as the embarrassment of reporting a loss,” he adds.

Several theories hold sway here. Regret theory comes into play for investors who find a stock they had considered buying but did not go up in value.

Some investors avoid the possibility of feeling this regret by following the conventional wisdom. They only buy the stocks that everyone else is buying.