When you are promised “guaranteed returns”, it almost feels like a great win, doesn’t it? That promise sounds irresistible, but in reality, this “too good to be true” deal is far from being honest. This promise is actually a carefully crafted illusion, one we are here to break.
Why do we fall for these promises in the first place? Is there something deeper at play in the way we think and feel about money?
In our efforts to create awareness around mis-selling, we focused on how you are being mis-sold or mis-led into buying a financial product. But along the way, we realised the strongest defense against mis-selling lies in understanding ourselves. That we must explore our psychology: the fears we harbour, hopes we cling to, and cognitive biases that shape our decisions. Because once that inner wall of defence cracks, that’s when mis-selling finds its way!
What “guarantee” really entails?
Let’s get straight to the crux of it. What does a “guarantee” mean to you? Almost everything about mis-selling seems to orbit around this word. It’s been repeated so often, and so convincingly, that we rarely stop to question it. In the financial context, the effect of this word is often the exact opposite of what it promises.
Also, the truth lies in your plain sight: the products that appear “safe” have risks. And if there’s one thing truly guaranteed in financial investing is that there’s no guarantee.
- Fixed deposits from banks: They are only insured up to a certain limit, currently ₹5,00,000 per depositor per bank, covering both principal and interest.
- Direct bonds: They are vulnerable to different risks like default risk, even supposedly safe “government bonds”.
- Insurance payouts: Inflation can erode your payouts, reducing your income.
- Debt mutual funds: Often marketed as low-risk, they are still impacted by default and interest rate risks.
You see, why no investment is ever truly “guaranteed”! And yet, despite all this, we keep chasing guaranteed returns.
The danger of chasing guaranteed returns
Psychologically, we crave the comfort of security. Our brains are naturally wired to seek this safety over uncertainty through a deep-rooted instinct called loss aversion. For example, the pain of losing money feels twice as much as the joy of gaining it. So, when you are being offered a “guaranteed returns plan”, it directly speaks to that fear of loss inside you instinctively.
And so, we buy into it because that plan gives you security and control, which are powerful emotional anchors. We start living comfortably in this fairytale of certainty until one day, this carefully crafted illusion shatters, and we realize that this plan was nothing but a cleverly disguised risk.
Hence, our own psychology plays its role, and that’s exactly what we are about to uncover next.
How our psychology plays with our minds
Every investor carries a psychological makeup that shapes his/her financial personality. This personality is the combination of beliefs and emotional tendencies toward money, which profoundly influences their decisions.
Read More: Find out your financial personality. Take our MoneySign® assessment
This means turning the lens inward and asking ourselves why we are drawn to such tempting promises like “guaranteed returns”. Hence, it’s time to shift the focus from the product to our own thinking.
In The Psychology of Money, author Morgan Housel makes a simple yet profound point:
Doing well with money has little to do with how smart you are and a lot to do with how you behave.
That one line sums up why financial success is rarely about knowledge alone. Many people don’t falter because of poor understanding, but because emotions like fear, greed, or overconfidence steer their decisions. How we feel about money often matters more than what we know about it. Our brains rely on mental shortcuts (called heuristics) that are tightly linked to cognitive biases, leading us to misjudge outcomes or chase comfort.
The role of our emotions in financial decision-making
Emotions like fear, greed, and hope are deeply tied to our sense of security.
Fear, for instance, can cause us to prioritize safety over anything else. This emotional need for security overrides rational evaluation of a scheme, blinding us to downsides like low returns, etc. For example, a retiree, anxious about losing money, agrees to invest in a traditional endowment policy that promises “guaranteed returns”, without realizing it offers lower-than-inflation returns and long-term lock-ins. A question to reflect: why would a retired person, someone who needs a steady income and flexibility, need a “long-term lock-in”?
The desire for quick and high profits turns even a seasoned investor into a greedy one. This often leads to impulsive purchases of products while ignoring their associated risks. For example, a young professional seeking quick gains may hurriedly commit to a “guaranteed double your money in 3 years” scheme, without scrutinizing the product, how the returns are generated, and whether that product is even regulated.
Hope, a subtler but equally powerful emotion, often leads investors to cling to the belief that a particular product will eventually deliver, despite ongoing underperformance. They begin to justify the poor results, blaming market conditions or temporary setbacks, rather than reassessing whether the product was suitable in the first place.
Next comes our cognitive biases
It’s strange how psychology plays subtle little games with our minds, isn’t it? Just when you think you are being perfectly rational, your mind slips into a few cognitive biases, automatic modes that push you toward quick decisions, often at the cost of rational thinking. These biases, more like, blind you to other options. Hence, a bias is restrictive or limiting.
Our psychology tries to keep us safe with thoughts like, “this feels familiar, so it’s safe” or “follow your gut”. While that can be great for everyday life, this attempt at protection can steer you straight into trouble. Because in finance, what feels quick and familiar is often a terrible mistake. Let’s see how!
Confirmation bias
Confirmation bias leads you to favor information that supports what you already believe. In finance, it can view a product as good simply because it fits existing opinions, while ignoring anything that contradicts them. This bias is more evident in credible settings like banks, where trust is high.
For example, you have read positive things about Company ABC, so when the salesperson pitches a “guaranteed returns” plan from that company, you are less likely to question it. Your existing impression of the company does the convincing to buy that product, overlooking the product’s actual merits.
The confirmation bias isn’t limited to authority figures. When your trusted friend recommends a product, this familiarity may nudge you into buying it.
Herd mentality
This bias is enforced when you tend to follow the crowd and invest in the product others are buying. In the context of mis-selling, financial products are marketed as trending and widely accepted, creating a trap for customers.
Referring back to the example above, you will end up buying that pitched “guaranteed plan” because many people from your age group are buying. You may believe that if others are investing in this product, then it must be good. But, in reality, popularity doesn’t always equal suitability. Every investor has unique needs.
How mis-sellers exploit investor psychology
Mis-sellers often rely on psychological triggers to get away with their sales pitches. They present products that “feel” right to you, but aren’t actually suitable.
1. They appeal to your emotions.
As mentioned earlier, your emotions like fear, hope, and greed become their weapons. You may have heard these statements before:
- “Don’t risk your money in the market; this plan gives guaranteed returns.” (Fear)
- “This is the perfect product for your child’s future, don’t miss out.” (Hope)
- “Why settle for 6% in FDs when this can give you 12% annually?” (Greed)
Another example: While mis-selling an insurance policy, emotional triggers like fear are often amplified. In case of mis-selling a mutual fund, cognitive biases like herd mentality are taken into account, encouraging investors to chase higher returns while skipping the risks, because that’s the current trend.
2. They create a false sense of urgency.
Pressure tactics are the next popular mis-selling tactic. Salespeople pressure customers into buying by saying things like:
- “This offer is valid only until the end of the day.”
- “The registration’s almost full, decide quickly.”
This creates false urgency in the eyes of customers, and they often don’t take the time to read the fine print or investment clauses. This also doesn’t let them compare other available products that may be a better alternative than the one being offered.
3. They oversimply the complex products.
Many financial products, especially insurance-linked plans, are complex. Mis-sellers often:
- Use vague language like “tax-free,” “market-linked but safe,” or “best of both worlds”.
- Highlight only the benefits, hiding limitations in documentation.
This makes a product appear much more appealing and low-risk than it actually is.
Investors make decisions on how a product makes them feel in the moment. Mis-sellers know this and use it to their advantage. They tap into your emotions by appealing to your desires, like getting better returns at 12% instead of 6%. They give you less time to decide by creating urgency (mental shortcuts play their role here).
How to protect yourself from financial mis-selling
- Recognise your emotional triggers to avoid making impulsive decisions driven by these feelings.
- Seek information that challenges your existing beliefs and opinions to counter confirmation bias. Do not accept only one piece of advice presented to you.
- Acknowledge your knowledge limits instead of relying on the “perfect” strategy.
- Don’t rush into making decisions and take some time before you agree to any plan.
- Consult with a Qualified Financial Advisor for unbiased advice that matches your financial personality and your goals.
The promise of guaranteed returns is powerful; it taps into deep emotions and exploits them. Mis-sellers know this well, which is why their sales pitches are designed to do exactly that. What fuels this mis-selling further is the lack of financial literacy on the customer’s end. If you don’t understand the product, like how it works, what it promises, and what laws govern it, you become an easy target. This is why financial literacy is your strongest defence. The more you know, the harder you are to mislead.
