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Saturday, January 10, 2009

Why do People Fall for Ponzi Schemes?

Why do people fall for Ponzi schemes? Michael Shermer, editor of "Skeptic" magazine (well worth reading in its own right -- http://www.skeptic.com -- but not usually dealing with financial scams) explains in the following link:


(Scroll down a bit in that web page to get to the relevant article).

Shermer notes that there are four major factors -- situation, emotion, gullibility, and personality -- that effect who is likely to be scammed in what manner by whom. Yes, gullibility -- which is not exactly stupidity -- is to blame, as is greed; but the social and emotional "trappings" of the scam are very important.

Shermer agrees that the big mistake people made was not that they invested in Madoff's scheme: "the lie perpetrated by Madoff was not all that obvious or easy to recognize (in fact, it is very likely that Madoff's operation was legitimate initially but took the Ponzi route when he began to suffer losses that he was too proud to acknowledge)."

The real problem, as quatloos! warns over and over again, was "throwing all caution to the wind, as in the stories of many people (some quite elderly) who invested every last dollar with Madoff or one of his feeder funds". Such blind fate, notes Shermer, has an almost "religious quality" to it.

Read the whole thing.

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