One allure of the Ponzi Scheme
The Ponzi scheme can be described very simply. An investor pays $x in return for getting a large "yield" or return on his money, but the return comes from later "investors" buying the same opportunity.
Virtually every news story on ponzi schemes fail to explain why the schemes are so attractive- greed is the only explanation.
But greed is not a complete answer. There is at least one more complete explanation: our naive induction schemes are bad, incorrectly generalizing from a past series of events.
Here is a little test to take. If I said that I could manage $100.00 for you and give you a 10% return on your money, how months of getting this return would you need to believe me? Call that number "N".
Now, suppose I said that I didn't even need the $100.00, I would give you your 10% return, if you would contract with me to pay the $100.00 after N months? Is this a better or more sure idea?
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The answer is no. For most people N is 3 or 4 months. But the correct answer has to be at least 16 months.
I can perform the 10% miracle by simply returning $10 of your capital to you each month. After 3 or 4 months, my fund goes "bankrupt" and I walk away with your $60.00 and large laments about our "collective" misfortune.
Naive induction, combined with regret, and social proof -everyone who is anyone is invested- are powerful enough to overwhelm many skpetics.
Technorati Tags: ponzi schemes, ponzi scheme, greed, money, correct answer, naive induction
