Since I am up to my eyeballs in mortgage paperwork, I figured I would pass along this infographic about Ponzi schemes. We have all heard about them, yet we still find people falling for them. Why is that? I wrote an article last year entitled “Why Do We Fall for Ponzi Schemes?” I thought it would be good to rehash that topic because I get asked about it on occasion. First, let’s find out what a Ponzi scheme actually is.
What is a Ponzi Scheme?
A Ponzi scheme is typically related to investments. Someone or a group of people get “investors” to give them money with the promise of a return. These returns are not typical in the investment world. They tend to be quite high, like doubling your money quickly. The schemer is essentially telling you that you will get rich quickly. Unfortunately, people still fall for this type of thing. The thought of getting fast cash is just too much to pass up. Once the schemer gets the original investment, they go out to find more investors. They ask for more money, which is then paid back to the original investors. This shows them they are getting a return. This keeps them interested and typically gets them to reinvest back into the scheme. As the scheme grows, more and more people become investors. Each tier of people get paid by the new investors.
Ponzi schemes can last a long time as long as new investors are continually added. Remember, most of these schemes don’t actually involve any investing. The schemer just gets more money and distributes it slowly to each investor based on when they invested. Most Ponzi schemes are found out once new investors stop coming. When the money dries up, then there is nothing left to distribute. There are times when schemes break up because people get wary and start noticing what is going on.
Why Do We Fall for Ponzi Schemes?
This answer is quite simple. We love money! Ponzi schemes happen for two reasons. People are in love with making money. They are more in love with making money fast. Ponzi schemes seem to be the magic bullet that no one else knows about. You have the inside track to be a millionaire! Who wouldn’t want that? The problem is most Ponzi schemes are orchestrated by people that others trust. Trust is a powerful motivator. When you trust someone with your money, you are giving them a lot of power. People tend to let their guard down when they trust someone. That is when people can lose their money.
Here is a great infographic that will explain the Ponzi scheme and show you some of the biggest ones of all time. It will also give you some warning signs about Ponzi schemes. Always remember that if it is too good to be true, it probably is. That saying will always be good and it relates to so many things, including Ponzi schemes!
Infographic via bestaccountingdegrees.net