How Ponzi Schemes disguise themselves

Ponzi in 1920 (Photo credit: Wikipedia)

Ponzi schemes have plagued human existence for nearly 100 years, and it proliferated ever since due to better communications. They have managed to survive due to disguises they adopted thus avoiding detection until it's too late for the victims.

Just in April 2012, the self-proclaimed "youngest black CEO in publicly traded company", Ephren Taylor III, was charged by SEC as peddling a ponzi scheme to black churches and black investors.

And who can forget Bernard Madoff's "largest Ponzi in US history", involving 170 BILLION dollars over 20+ years.

Every day you hear about even more Ponzis, from small ones (a couple guys got cheated out of a few hundred thousand) to big ones like Alan Stanford who may have bribed an entire island.

What makes Ponzi schemes so resistent to detection?

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Cognitive bias: the "anecdotal" fallacy

Kobe Bryant subs out vs the Washington Wizards (Photo credit: Wikipedia)
If he endorsed a car, does the
car perform any better? No! 

MLMers are very fond of the "anecdotal fallacy", where they use either personal experience, or a single (or a few) instance(s) to "prove" that their "opportunity" is great.

Very often, this is used in conjunction with the "it paid me" argument, as testimonials. In other instances, it's to "prove" the prowess of whatever product or service the MLM is pushing. For example:

This product really works! I have been taking it for a month and I feel much better! I lost 20 pounds and my allergies are gone! I recommend this to all my friends! 

Not an actual comment, but you have all read or heard things like that. You probably see it on TV or hear it on radio every day. It is a normal propaganda technique.

The person advertising the item should not change the value of the item. If Kobe Bryant (NBA basketball star) or any other professional sports star (except race car drivers) is endorsing a car, it does not make it perform any better than without his endorsement.

(NOTE: This is DIFFERENT from "authority", where an expert like Kobe Bryant endorse a pair of basketball shoes,  he would be considered an expert on such shoes so his claim would count more. We will discuss "authority" or "expert testimony" later)

Same with a business opportunity. Just because one person say it's great doesn't mean it's great for EVERYBODY. There is no proof that you can replicate their "success", or their success is not an exception to the rule. You need a far larger sample size than "one" or "several" to prove anything. There can be a LOT of factors that affect the outcome.

Cognitive Bias: "first kiss" and "last supper"

Do you remember your first kiss? How about
fourth? Seventh?
Kiss You (Photo credit: Wikipedia)

The human mind has a lot of cognitive bias, and two of them involved "first kiss" and "last supper", but not in the literal sense.

Human memory is frail, because we don't actually record everything with equal intensity. Instead, we remember the first things, and the most recent things more clearly than anything in the middle.

Do you remember your first kiss? How about fourth or fifth?

Do you remember what you ate last night? How about six days ago at dinner?

In each case, you probably remember the first, the last, but almost nothing in the middle.

A scammer can take advantage of that.

"I still believe", or the "true believer syndrome"

Cover of The Psychic Mafia
Psychics are believed even after
they admit they were fully
fake. True believers will
ignore facts to continue
to believe. 

Someone who have their loved one recruited into a scam asked, how is it that this scam has such total control over his loved one, so much so that the loved one, even when confronted with evidence that it's a total scam, refuse to accept the truth?

There is an explanation, but there is no solution.

In the book "The Psychic Mafia" (1976) by M. Lamar Keene, a supposed psychic medium named "Raoul", who had many believers, openly admitted to being a complete hoax and fraud. However, many people persist in believing that this psychic is genuine and created various excuses for that statement, like "he was pressured into it" and so on.

The point is proven when James Randi, famous magician and skeptic, in cooperation with an Australia news program, staged a hoax in 1988, where an actor named Jose Alvarez was to "channel" a 2000 year old spirit named "Carlos" in front of live audience, then the entire performance was revealed to be a staged hoax. There was no Carlos. However, many in the audience were not dissuaded.

Randi remarked:

no amount of evidence, no matter how good it is or how much there is of it, is ever going to convince the true believer to the contrary