A ponzi scheme is a classic scam that despite being guaranteed to collapse continues to work and leave people penniless. It goes something like this. John tells Jane that he has a fantastic money making opportunity. If Jane invests she will get an annual return on that investment of 20%. Wow! Jane invests and sure enough next year she gets a payment of 20% of her original investment. Other people hear about her success and sign up. Soon John has many investors and a large amount of money in circulation. But none of that money was ever invested.
The second person that signed up to John’s scheme was Jack. John simply took 20% of Jack’s money and gave it to Jane. The rest he pocketed (and most probably promptly spent). Just like he pocketed Jane’s money. Of the third person’s money, John took 20% for Jane and 20% for Jack. The fourth person’s money paid the 20% of the first three. And so on, until John is unable to recruit enough new people to pay the returns of the current list of ‘clients’. There’s a short delay during which John avoids calls, perhaps changes address and if he’s sensible hires a good lawyer (with whatever money is left). Then the whole system collapses in on itself. Well, that’s the basics. Real life ponzi schemes can be much more complicated than that. But they all work on the same principles. Why they work, why people get sucked in and lose perhaps everything they have, are very interesting questions. Questions that get asked quite a lot since Bernie Madoff. If you rip people off to the tune of $18 billion dollars I guess that will make the news for some time. Continue reading