Understanding Ponzi Schemes
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Understanding Ponzi Schemes

Can Better Financial Regulation Prevent Investors from Being Defrauded?

Mervyn K. Lewis

A Ponzi scheme is one of the simplest, albeit effective, financial frauds to engineer, and new schemes keep coming forward. Despite this, however, people continue to invest in them. How are we to account for the seemingly never-ending lure of such schemes? In providing answers to this central question, this concise and well-researched book examines how Ponzi schemes operate, how they differ from pyramid schemes, Ponzi finance and other financial arrangements.
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Chapter 8: What can behavioural finance tell us?

Mervyn K. Lewis


A common view is that the victims of Ponzi schemes have only themselves to blame. After all, they handed over the money for investment, in which case they are either greedy or gullible. Greed is the position taken by Charles Kindleberger (1989). Despite acknowledging that the illegal or immoral activity of the perpetrators involves ‘misrepresentation’ and the ‘violation of . . . trust’ (p. 88), Kindleberger notes that ‘Cynics may share the belief of W.C. Fields that “You can’t cheat an honest man”’ (p. 89). He goes on to argue that swindling is: demand-determined, following Keynes’s Law that demand determines its own supply . . . In a boom, fortunes are made, individuals wax greedy, and swindlers come forward to exploit that greed . . . Sheep to be shorn abound, and need only the emergence of effective swindlers to offer themselves as sacrifices: ‘There’s a sucker born every minute’. . . Greed . . . creates suckers to be swindled by professionals. (p. 89) Nevertheless, few of the schemes examined here offered Charles Ponzi-type levels of profit that would have immediately invoked the ‘if it sounds too good to be true, it probably is’ line and set off warning bells; 2 or 3 per cent points per annum above bank deposit rates hardly seems excessive, certainly when measured against those that can be obtained (unfortunately quite legally) by operating or participating as an investor in payday loan lending activities.

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