Inflation of trust

The victimization of thousands of small investors by a dubious company styling itself as the “Aman Futures Group Philippines Inc.” is of great interest not only to law enforcement authorities but to students of society as well. How a business firm with no credentials or track record was able to entice thousands of people in a small city to part with their savings should tell us a lot not only about the Filipino mind and culture, but about the nature of modern society itself.

The opportunities for investing one’s money have become varied and complex. Banks now routinely advise their clients to consider putting their money in bonds and pooled investments that pay higher returns than ordinary deposits accounts. Many of the financial products on offer in the market nowadays are, however, so dense that only the best informed investment analysts can explain how they work. Savers simplify the choices they need to make by relying on financial advice.

It is easy to say we should all be financially literate, but, as the collapse of Wall Street’s reputable investment firms in 2008 showed, the financial markets have become so intractable that the regulators and credit rating agencies themselves were caught flatfooted.

This brings me to the point I explore in this column: the nature of gullibility and trust. If you lend your money to a borrower who issues you a postdated check in return, you would probably be called gullible if the check bounced and you lost everything. But you would think yourself smart if at the end of the period, you got your principal back plus the huge interest that was promised.

Gullibility is relative. Its opposite is not cleverness but the inability to trust. Between the two poles lies a wide range of individual types who make decisions based on a combination of instinct, solid information and firm guarantees. We all belong to any of those types, as do most of Pagadian City’s small savers. As it usually happens, the higher the returns, the greater the risks—meaning, there is little information to go by and no guarantees. In such situations, one tends to go by one’s instincts and the assurances of people whose judgment we trust.

I would be very surprised if those who invested in Aman Futures never entertained the possibility that they could lose all their money in this venture. I think we can assume they were more or less in a similar frame of mind as the Pagadian City Internet café owner who lost the P200,000 he had pooled from the savings of his family and other relatives. This is what Andres, a business administration graduate, told the Inquirer: “From the start, I knew it was a scam and bound to burst like a bubble, but I took my chances. For those of us who have simple hopes and limited means, the idea of hitting [the big time] … is very attractive. It was just unfortunate that we came in late.”

People were aware of the risks, but they took their chances.

They were not just being gullible or stupid. They trusted their instincts, and they trusted their relatives and friends. That trust was bolstered by the word-of-mouth testimonies of people they knew—including government officials, policemen, and businessmen—who invested and got their money back with incredible returns.

What this leads to eventually is what a sociologist calls an “inflation of trust.” Trust is initially generated by demonstrating that investors are promptly and abundantly rewarded, and, as importantly, by drawing in reputable and legitimate investors. “Inflation,” says Niklas Luhmann in “Theory of Society” (2012), “occurs when communication overdraws its line of trust, when it assumes it has more trust at its disposal than it can generate.”

In pyramiding scams, that point is reached when the initial investors who profited from the scheme decide to take out all their money from the scheme, and no new ones could be recruited fast enough to cover payments that are falling due. That is the reason why Aman Futures shifted gears and started to tell small savers to pool their investments. That strategy cleverly transferred the burden of generating trust to the community itself.

When the figures behind the scam vanish from the scene, as they invariably do, the recrimination that follows is borne by those who, wittingly or unwittingly, had tapped into the community’s reservoir of trust in the course of recruiting new investors. This is already beginning to happen in Pagadian, the epicenter of the racket. Only a few of the investors will take a stoic stance and say they gambled and lost. Many will think they trusted, and they were betrayed.

There is nothing wrong in trusting. That is how we make decisions in an increasingly complex world. We heed the judgment of those we implicitly trust and follow the example of people we expect to know better. We may be faulted for the reckless investments we sometimes make.  But who are we to doubt the shrewdness of the city’s top officials and big businessmen who risked their own money in what may seem at first blush as nothing more than an elaborate scam?

More importantly, we have every reason to expect that an entity like Aman Futures, which was openly taking large amounts of investments from the community, would have been promptly stopped if its business was not legitimate. It took a year for this scam to unravel. There was clearly a failure not only of government here, but of media and civil society too.

To live in society is to trust that institutions will do their work. For it is not possible for any individual to find his way in the modern world by relying solely on his own personal knowledge and cognitive skills.

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