Why Do We Fall For Ponzi Schemes?
I wanted to write this article as a follow-up or add-on to my “How You Can Get Rich Quick” article I put up last week. My idea for this is to try and figure out why we, as humans, fall for ponzi schemes. If you don’t know what a ponzi scheme is, here is a detailed definition from wikipedia:
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going. Source: Wikipedia
So, you now know the definition if you didn’t before. Let’s get back to it. I have actually met someone that has lost quite a bit of money in a Ponzi scheme. They realized that they go duped, but I wanted to dig in and see why they did it. Why did they think that they were the special ones to hear about this “deal”?
We Love Returns
As a beginner investor, I can say that I enjoy when I get returns. The higher the better for me and I am sure that everyone is like that. We stick to the general investment advice and keep on keeping on. I am not one that wants to go out and find some great penny stocks or get stuck in a terrible stock that doesn’t gain.
When we see that return percentage that is on the high side, we get excited. We all want to make money quickly and investing can be a way to do it (Disclosure: I do not recommend using investments as a way to get rich quick). If someone tells us that we can have the chance to make a great return with almost no effort, we jump at the chance. Returns get our investment mojo going!
We Want Easy Money
I don’t care what you say, everyone wants easy money. Hell, I would love it. Unfortunately, that is just not the reality. Yes, I want easy money, but I know that that doesn’t really exist. It is the same thing as that money tree I have been trying to plant in my backyard. Something grows, but it surely doesn’t have money on it. Easy money is a concept that has a lot of followers, but very few executors. Only a small handful of people actually know how to make easy money and most of the time it is illegal in nature.
The Ponzi scheme really is built off of the easy money principle. Ones that are running a Ponzi scheme tend to look for those that want to make fast money. Ones that don’t want to work hard for their money. These are the people that are fuel for the Ponzi scheme fire. With the huge funds that Ponzi schemes bring in, we can see that there are still many people that just want to make easy money.
If it is Too Good To Be True…..
I am almost certain you have heard the saying, “If It is too good to be true, it probably is.”, so why do we keep pushing for the false hopes. I tell everyone to go for their dreams, but there is a difference between a dream and a false sense of reality. I have spoken with many people in the past that know the old saying, yet they either choose not to follow it or think it is bogus. It is a simple, yet power saying that we tend to use when we hear something that peaks our interest. I have used this saying numerous times in my life and it has never failed me.
If someone was going to offer your stock market returns in the 20% range, would you jump on the opportunity? I know I wouldn’t. These type of returns in the stock market are unrealistic. People should not expect to see 20%+ returns if they are investing in the market. The average is around 8%. People get sucked into Ponzi schemes because they love to hear the pitch. Most people that fall for Ponzi schemes just hear the number and then start to salivate. I love making money and I love when it comes easier than others, but I am also someone that understands reality.
So, Why?
I am not a psychologist and I don’t play on on TV. SO, for that reason, I am reaching out to you, my readers. Why do you think people fall for Ponzi schemes? Have you met anyone that has been duped into giving a lot of money to someone in return for unrealistic investment gains? We have all heard of Ponzi schemes in some form or fashion, so why do we hear that people are still falling for them? I just don’t understand. Maybe some think they are in some super secret and special club that no one else is. Unfortunately, that might be true, because they end up falling for something that doesn’t exist and lose money.
A fellow blogger, from My Money Design (MMD), wrote about an experience watching a pyramid scheme unfold. It was a good read. MMD also illustrated a Ponzi scheme example. Nice work MMD!
I would love to hear you opinion on this. Why do people fall for such schemes? Is it just the simple answer of people wanting to make fast and easy cash?
Image courtesy of Stuart Miles / FreeDigitalPhotos.net
I think you’re spot on here. People like to think they can find a better way of doing things and it’s no different when it comes to investing. Sales pitches for all kinds of financial products, ponzi scheme or not, promise higher returns and lower risk. Like it or not, that’s what people want to hear. Hopefully more people start to learn that there is no golden ticket and it simply takes hard work, consistency and discipline.
You are correct about that is what people want to hear. I use this philosophy when I am doing marketing for other companies. People want to hear certain things.
I’m so suspicious of anything like this, whether it’s investing through a friend or an “online opportunity” or whatever. I don’t understand how so many folks fall for them! Multi-level marketing is similar in nature, the success stories suck you in I guess.
They see the $$. That is probably the bottom line.
I would say people fall for these because of laziness. They are too lazy to really think it through and ask the right questions. They are too lazy to work and invest long term to increase their wealth. They are too lazy to even read the host of articles online, like this one, that focus on the ridiculousness of these schemes.
Right on Brian. Laziness breads terrible creativity. People think they are getting creative on how to stay lazy, but they end up just making their situation worse.
When I think of ponzi scheme the first thing I think of is social security, the biggest ponzi scheme of all (though some won’t even recognize it as a ponzi scheme). I think the worst thing about falling for a ponzi scheme is that you don’t think about the inevitable endgame, which isn’t pretty. But yes, people want easy money and high returns.
I actually never thought of it DC. I don’t like social security because I can’t handle my own money. I will end up paying for someone else’s retirement, while my own is in limbo.
I’ve heard that a basic element of the human psyche is that we want to be led, to give up the responsibility of making decisions to somebody else. I’m not sure that is true of all people, but it certainly seems to be true for many. And any con man worth his salt is going to be a smooth talker who makes it seem that what they are saying makes so much sense. Combine the human need for relinquishing control, the desire to make money, and a good con man, and you have a situation ripe for getting ripped off.
Great comment Edward. This is entirely true. People want the hand holding and the feeling that they don’t have to make the decision.
Good post Grayson! I think it goes back to a number of things – mainly wanting the easy money and being lured by the pitch of very nice returns as you said. I think the other, at times, could be ignorance that it’s virtually impossible to get such crazy returns year in and year out. Many, unfortunately, hear the pitch by the guy and get all too sucked in. I know we only hear about it when it happens in cases like Madoff, but I’d wager to guess that it happens much more often than we really know about.
I am sure this happens way more than we know. There is always someone that tries to make money off of those that can’t think for themselves.
Despite knowing that “it’s too good to be true” and there is no “easy money”, we all want to believe it’s possible. So when someone pitches that possibility, I think people get wrapped up in the fantasy of it all and their critical thinking goes out the window.
Very good point Stefanie. I believe you here.
I think people fall for it because they don’t think hard enough about it. They also might get caught up in the thought that they MAY become rich.
The lust for the possibility. That is why so many play the lottery.
About a year ago during a business trip I stopped at a Tim Horton’s for coffee and was witness to a Ponzi Scheme recruiting meeting. It was outrageous how much they were trying to hype up how easy it is to make money, how rich they were all going to get, etc. After the meeting the “elders” of the group hung back to talk about ways to get more and more recruits. They kept asking if I wanted to sit in their meeting. I told them I was already rich enough and didn’t need to join their cult 🙂 If you want I can email you the post I wrote about this last year on MMD when it happened.
Thank you for the story MMD. I appreciate you sending it to me as well.
I think it’s human nature to be susceptible to seductions that seem to promise a path to riches while bypassing the work and time that normally are required. Many of us hate our jobs or have one purely for a health insurance benefit, show up only for the $$, and count the days until we can retire. Fertile ground for ‘get rich quick’ schemes!
Spot on Kurt. I didn’t even want to bring up all of this, so thank you for doing it!
People fall for these schemes because they are looking for an easy way to making money. I think some times they fall into it simply from being naive.
They are just looking for the easy way out.
I think you are right about feeling like you are special and in a unique “club” that others don’t have the chance to buy into. Generally the person running the scheme is someone you trust. When I was younger, there was a minister at my Grandparent’s church who swindled a bunch of old people out of their life savings in some sort of Ponzi scheme. He ended up in the pen, but the old people never got their money back. If you can’t trust the preacher, who can you trust?
Good point Kim. Most of these schemes are done by people either close to you or ones that you trust.
I think it’s all about easy money. We all want to be millionaires without having to do any of the work. When we see or hear of a way to make money doing little or nothing, we get excited and that clouds our judgment.
I am with you here Jon.
You pretty much hit it. Mostly, it’s greed. Ponzi schemes are usually with large sums of money, so it’s the rich trying to get richer.
Good point on the greed. There are so many greedy people out there, just trying to make a buck off of someone else.
I agree with Jacob that Ponzi schemes are for rich trying to get richer. I think that a more sensible person who works hard for his/her money is unlikely to fall for it simply because it’s too good to be true. Rich people, on the other hand, would have earned some of their money through investing and earning a profit which in theory is easy money, so why not gamble it, easy come easy go?
Interesting perspective Eva. Thanks for weighing in.
Awesome! Thanks Grayson for sharing my Ponzi Scheme stories.
You are most welcome MMD!
Everybody wants easy money, I guess! Why not, right? Ponzi schemes are just that – schemes.
People do love the idea of easy money. Unfortunately, in reality, it just doesn’t happen.
1. we’re greedy.
2. we’re not well informed (so I don’t say we’re stupid).
3. we’re lazy.
We actually had 2 Ponzi schemes in my country 20 years ago. People were being promised 8 times their investment. Well, imagine MILLIONS of idiots sold their houses and put their lifelong savings to become ‘rich’. You can guess the outcome. Even now, after 2 decades, they haven’t recovered their money. Some killed themselves, some were completely bankrupt.
Money is made WORKING and kept by SAVING. There’s no special recipe, there’s no scheme. Hard work and good management will get you through 😉
Great list dojo. I certainly agree with you here.
I like DC’s comment about Social Security being a Ponzi scheme. I watched a documentary a few months ago that made in interesting case for US government debt being one big Ponzi scheme with the Federal reserve constantly having to increase the money supply and purchase government bonds just to keep the whole thing from falling on its head. I’ll have to try and find the name of it, it was an interesting watch.
I would be interested to watch that, but also it would probably piss me off!
I think people fall for them because of hubris. They think they’re too smart to be conned, meanwhile that overconfidence just makes them a target.
Awesome point Mike. Thanks for this one!
I think sometimes people just put their trust in the wrong people. Many prudent investors were victims of Bernie Madoff.
I think people look for reasons to believe a scheme is legit because it seems so easy to make money fast. It’s easier to find reasons to like a scheme than to not like one. However, a lack of due diligence will cause problems down the road.
Great comment. Thank you Stephen.