Why Gullible People Continually Fall For Scams, Written By A Madoff Victim
Posted by Timothy Sykes on Fri 23rd of Jan, 2009 09:05:34 AM
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I saw THIS great article in the WSJ the other day…or maybe somebody sent it to me…I can’t remember, too much going on right now, mostly vacationing and working on the final bits of the TIMfundamentals DVD…either way, it’s a great read…
Here are some good bits and pieces, the article summary first:
Intelligent people have long been ruined by frauds. Psychologist Stephen Greenspan, who specializes in gullibility, explores why investors continue to be swindled — and how he came to lose part of his savings to Bernard Madoff.
Sounds interesting right, here are some basics:
A Ponzi scheme is a fraud in which invested money is pocketed by the schemer and investors who wish to redeem their money are actually paid out of proceeds from new investors. As long as new investments are expanding at a healthy rate, the schemer is able to keep the fraud going. Once investments begin to contract, as through a run on the company, the house of cards quickly collapses. That is what apparently happened with the Madoff scam, when too many investors — needing cash because of the general U.S. financial meltdown in late 2008 — tried to redeem their funds. It seems Mr. Madoff could not meet these demands and the scam was exposed.
The scheme gets its name from Charles Ponzi, an Italian immigrant to Boston, who around 1920 came up with the idea of promising huge returns (50% in 45 days) supposedly based on an arbitrage plan (buying in one market and selling in another) involving international postal reply coupons. The profits allegedly came from differences in exchange rates between the selling and the receiving country, where they could be cashed in. A craze ensued, and Ponzi pocketed many millions of dollars, mostly from poor and unsophisticated Italian immigrants in New England and New Jersey. The scheme collapsed when newspaper articles began to raise questions about it (pointing out, for example, that there were not nearly enough such coupons in circulation) and a run occurred.
And here’s a little history:
Tulipmania
In the 1630s, tulip-bulb speculation raged in the Netherlands. Prices of some rare bulbs doubled weekly, or even daily, and rose so high that people were investing in shares of one bulb, rather than an entire bulb. The market crashed in February 1637.
Look and Learn/The Bridgeman Art Library
The South Sea Bubble
The British South Sea Co. was formed in 1711 and promised a monopoly on trade to the Spanish colonies. It lured investors with the promise of riches from abroad. Prices of shares spiked and then collapsed in 1720. Sir Isaac Newton lost the modern-day equivalent of about $1 million.
Bettmann/Corbis
The Ponzi Scheme
The infamous Charles Ponzi, who was based in Boston, began with 16 investors in 1919; his pyramid scheme eventually took in $15 million. In 1920 Mr. Ponzi was convicted of mail fraud and spent several years in jail.
The 419 Scam
EPA
Many email users are familiar with the 419 fraud, in which scammers (often based in Nigeria) offer a share in a large fortune in exchange for a fee. Some cases have gone to trial. In 2005, Amaka Anajemba (above center) was convicted of taking part in a scheme that defrauded a Brazilian bank of $242 million.
So, enough teasing, go on, read the whole article, it’s worth it, trust me.
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