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:

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