Ponzi Schemes Thrive on Human Nature

Thoughtware Article Published: Aug 22, 2014
One person looking at a computer. One person looking at a phone

A recent New York Times article reminded me how many people continue to be lured into Ponzi schemes. From my vantage point, the last six years have helped shine a light in this dark corner of the investment world—perhaps more than any other time in recent history. High-profile con artists like Bernard Madoff, Scott Rothstein and Allen Stanford put Ponzi schemes back on the front page. Partly as a result of these frauds, there’s better information available today than ever before (look at investor.gov). Yet the schemes continue to thrive, and new ones are discovered every month. Why?

First, a brief history:  Ponzi schemes, at least in some form, probably date back a few hundred—maybe even several hundred—years. The “Ponzi” label, though, wasn’t coined until 1920 when Charles Ponzi’s investment fraud came crashing down. His outsized returns on postal reply coupons lured many investors with promises of a 100 percent return on their money every 90 days. In reality, he was paying old investors with new investors’ money and keeping plenty for himself. It was all a scam. The Ponzi label stuck and is still used today.

Back to the question; why, almost 100 years after Charles Ponzi, do so many investors continue to fall for these schemes? No one is held at gunpoint and forced to write a check. The attraction is almost always in the promise of a secure investment at a guaranteed high rate of return.

Human nature may be to blame for Ponzi schemes. A few thoughts come to mind:

  1. Seeking something better is human nature, and it’s not always greed. More money can mean a secure retirement or the ability to pay for a child’s college education. Ponzi con artists know how to play on these emotions.
  2. The investment opportunity pitched is somehow different than other cautionary tales in the news. Therefore, we might not recognize a scam when it’s happening to us.
  3. The blinders tend to go on when presented with a seemingly great opportunity. We don’t want to lose out on what we think is a once-in-a-lifetime offer. Tunnel vision sets in, and we start rationalizing and ignore warning signs.

The best con artists in the world cannot run a Ponzi scheme without the investing public. However, there may be an opportunity to make a dent in them—or at least shut them down earlier—by further increasing public education and monitoring efforts. Unfortunately, human nature means Ponzi schemes are unlikely to ever completely end.

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