Understanding a Ponzi Scheme: Victims’ Perspectives

Abstract

Ponzi schemes have received significant media coverage lately, due in large part to the Bernard Madoff scandal; however, there is limited academic research exploring investors’ decision-making processes when investing in what ultimately is discovered to be a Ponzi scheme. We conducted semi-structured interviews of 17 investors in a Ponzi scheme to better understand the investors’ decision-making processes, their perceptions of the fraud, and the mechanics of the fraud. Overall, the interviews reveal a fraud with the following characteristics: (a) older, educated victims; (b) a plausible story that traveled by word of mouth among people who knew each other well; (c) demonstrated returns over several months (people often watched others get checks for a few months before investing themselves); (d) low pressure (no urgency to invest); and (e) a “good guy” promoter who did charitable works. We discuss avenues for future research. (Author Abstract)