Ponzi Scheme
Introduction
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.
Objectives
We learn how it started.
We learn the key elements in running a Ponzi scheme.
We learn how big a Ponzi schemes can get.
We learn how a Ponzi scheme falls apart.
We learn how to identify and avoid being involved in a Ponzi scheme.
Methodology – This topic is from a secondary source.
The scheme is named after Charles Ponzi, who became notorious for using the technique in 1920. Ponzi did not invent the scheme (for example, Charles Dickens' 1844 novel Martin Chuzzlewit and 1857 novel Little Dorrit each described such a scheme), but his operation took in so much money that it was the first to become known throughout the United States. Five Key Elements in running a Ponzi Scheme:
1) The Benefit: A promise that the investment will achieve an above normal rate of return. The rate of return is often specified. The promised rate of return has to be high enough to be worthwhile to the investor but not so high as to be unbelievable. 2) The Setup: A relatively plausible explanation of how the investment can achieve these above normal rates of return. One often-used explanation is that the investor is skilled and/or has some inside information. Another possible explanation is that the investor has access to an investment opportunity not otherwise available to the general public. 3) Initial Credibility: The person running the scheme needs to be believable enough to convince the initial investors to leave their money with him.
4. Initial Investors Paid Off: For at least a few periods the investors need to make at least the promised rate of return - if not better. 5)
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.
Objectives
We learn how it started.
We learn the key elements in running a Ponzi scheme.
We learn how big a Ponzi schemes can get.
We learn how a Ponzi scheme falls apart.
We learn how to identify and avoid being involved in a Ponzi scheme.
Methodology – This topic is from a secondary source.
The scheme is named after Charles Ponzi, who became notorious for using the technique in 1920. Ponzi did not invent the scheme (for example, Charles Dickens' 1844 novel Martin Chuzzlewit and 1857 novel Little Dorrit each described such a scheme), but his operation took in so much money that it was the first to become known throughout the United States. Five Key Elements in running a Ponzi Scheme:
1) The Benefit: A promise that the investment will achieve an above normal rate of return. The rate of return is often specified. The promised rate of return has to be high enough to be worthwhile to the investor but not so high as to be unbelievable. 2) The Setup: A relatively plausible explanation of how the investment can achieve these above normal rates of return. One often-used explanation is that the investor is skilled and/or has some inside information. Another possible explanation is that the investor has access to an investment opportunity not otherwise available to the general public. 3) Initial Credibility: The person running the scheme needs to be believable enough to convince the initial investors to leave their money with him.
4. Initial Investors Paid Off: For at least a few periods the investors need to make at least the promised rate of return - if not better. 5)