In a book worth reading, “The Indomitable Investor”, the author, Steven M. Sears, writes on the tricks memory plays.
“Memory distorts confidence. People view memories as exact copies of the original experience. Yet, memory, psychologists conclude, is cobbled together from fragments of information similar to how paleontologists decipher the appearance of a dinosaur from pieces of bone.
If people are unaware of the reconstructive nature of memory and perception and cannot distinguish between assertions and inferences, they will not critically evaluate their inferred knowledge. In general, any process that changes the contents of memory unbeknownst to people will keep them from asking relevant validity questions and may lead to overconfidence.
Memory is clearly influenced by news media. In one experiment, scholars asked people to determine the most frequent cause of death in the United States. Lethal events ranged from smallpox to syphilis to car accidents, heart disease and cancer, fire, and all other manner of woes. They found that many people chose deaths that were caused by "dramatic, well-publicized events" and underestimated "quiet killers." Academic research convincingly demonstrates that people who think they know something about investing are the most susceptible to failure. They fall for scams because they think they know more than they actually do.
A NASD Investor Education Foundation study conducted in 2006 found that investment fraud victims were more likely than others to rely on their own experience and knowledge to make financial decisions. The study concluded that self-reliance could isolate people, and cause them to rely on their own judgment when seeking advice from others might be more appropriate.
A 2009 report on the psychology of scams that was prepared for England's consumer protection agency, the Office of Fair Trading, found that the more people knew about an issue, the more likely they were to fall for a scam. Because they felt competent in the subject, they overestimated their abilities to make good decisions.
This confidence in their ability appears to lead people to find information that confirms their point of view. The scientific name of this phenomenon is confirmatory information search, and it causes people to overestimate the quality of information that supports their preferred standpoint. Few mediums make it easier to confirm one's opinion than the Internet. This is likely exacerbated by the ease at which one can metabolize Internet information and absorb it as one's own.
The U.K. scam study found:
As a consequence, it is likely that people will have a higher tendency to respond to a scam which falls into their area of background knowledge than to one that does not: they are overconfident in their preliminary preferences (that is, to respond to the scam) and thus neglect inconsistent (warning) information that would help them to recognize the scammer's intention.
The most common tactics used in frauds: claiming to be from legitimate business, dangling the prospect of wealth, and showing examples of other people who have invested. By now, most people are likely thinking to themselves that they would never fall for a scam. Let's see. Some scams are subtle, and have all the hallmarks of a legitimate business.”