Physics and Investment Fraud

Apply the Laws of Thermodynamics to Avoid Investor Scam

Dec 16, 2007 Paul A. Heckert

The principles of thermodynamics, a branch of physics, can be loosely applied to discern between a legitimate high yield investment and an investment fraud or scam.

Laws of Thermodynamics

The laws of thermodynamics originated in the early days of the industrial revolution when engineers tried to design more efficient engines. They found fundamental laws of physics limited the amount of work obtainable from any engine. These three laws of thermodynamics in abbreviated form are:

  1. The work output of an engine cannot exceed the energy input.
  2. The efficiency of an engine is always less than 100%.
  3. It is not possible to reach a temperature of absolute zero.

These laws can be irreverently summed up as:

  1. You can't win.
  2. You can't break even.
  3. You can't even quit the game.

In one word it boils down to TANSTAAFL, which is an acronym for: There Ain't No Such Thing As A Free Lunch.

In physics and engineering this TANSTAAFL summation of thermodynamics means that devices such as perpetual motion machines designed to work with 100% efficiency or to give us energy for nothing are impossible. The same idea also applies to investments.

Investment Opportunities

Legitimate investment opportunities never promise something for nothing. When we put money in the bank to earn interest, the interest is not free money. We are giving up the use of our money in order to earn more money. If it is in the bank earning interest we can't spend it on fun stuff.

We can also put our money in the stock market or some other high yield investment in hopes of earning a greater rate of return. This higher return on our investment is still not a free lunch. To get the higher return we must take the risk that the stock market will do poorly. It often does. Generally legitimate investments with higher potential returns have a greater risk. We must pay for the higher returns by taking this risk. We might lose.

Avoiding Investment Fraud

We have all received unsolicited emails promising great riches from a fantastic investment opportunity or a share of millions of dollars just for helping someone get the money out of some third world country. Just send us your bank account number so we can deposit the money. Right!

We can loosely apply the laws of thermodynamics and the TANSTAAFL idea to avoid being taken in by investment frauds.

Investment scams and frauds nearly always promise fantastic quick returns with no risk. They promise that you can win big, but remember the first law; you can't win. Just as an engine cannot produce work from nothing, the economic engine cannot produce money from nothing. In the case of these scams you usually won't even break even.

Investment frauds and scams prey on people whose greed blinds their common sense by promising something for nothing. But just as in physics, there are no free lunches in economics. Look carefully before investing in something. If it offers something for nothing (a free lunch), avoid it. If it offers a reasonable return for the cost or risk involved, it might be a legitimate investment.

Avoid being taken in by investment fraud. Remember TANSTAAFL -There Ain't No Such Thing As A Free Lunch. It applies to investments as well as thermodynamics.

The copyright of the article Physics and Investment Fraud in Physics is owned by Paul A. Heckert. Permission to republish Physics and Investment Fraud in print or online must be granted by the author in writing.