Tuesday, September 18, 2012

Psychology of Ponzi Schemes and Schemers: part 1, the schemer

People have wondered ever since Charles Ponzi's name was attached to a financial fraud... how can people be so stupid, and the schemer be so evil?

In this multi- part series, I'll try to explain what psychologists learned about white collar criminals and how they tick, and how the criminals rationalize hurting other people financially and reaping the benefits, by taking advantage of many of our preexisting biases.

Part 1: The Mindset of a Ponzi Schemer

Origin of a Ponzi Schemer

Many Ponzi schemers start on this road by accident.

Charles Ponzi originally tried to actually do arbitrage of International Reply Coupons, but the success of his venture, with people actually throwing money at him, basically made him lazy and not do any real investing. He's too busy to bask in the limelight and enjoy the lifestyle (and try to fleece a whole bank) to actually make the money he's supposed to.

Many smaller Ponzi schemes did not start as Ponzi schemes, but genuine investments, but later evolved into a Ponzi scheme, as it's just so much easier to fake it than to do real investing. A very similar motive is to cover up losses. Sean Mueller, a Ponzi schemer caught in Denver Colorado, gained national infamy by snaring none other than famed NFL Quarterback John Elway in his schemes. He got a sentence of 40 years. In an interview, Mueller claimed that he had to cover up the losses in order to make back what he lost due to his incompetence. Except he never did, and the hole only got deeper.

Yet other Ponzi schemers knew exactly what they were doing, because they were exposed to a Ponzi scheme, and decided to improve upon it. Andy Bowdoin, head of Ad Surf Daily Ponzi, improved upon 12DailyPro, of which Bowdoin was personally a member.

That leads to classification of Ponzi schemes into two camps:  accidental scammers, and deliberate fleecers.

Both of them engage in deliberate deception. Both of them value confidence, and keep up appearances like good house, beautiful car, and so on. They cannot live frugally because to them appearing confident is part of their image, important for them to market their scheme.

But the main difference between them is motivation.

Accidental Scammer

Accidental scammers are just too busy covering up their incompetence. They had plenty of confidence, but not the skills and experience to back it up. To borrow saying from Hondo from Top Gun, "your ego is writing a check your body can't cash!"  They dug themselves a hole, but instead of admitting their problem, they cover it up. They rob Peter to pay Paul, and rob Jane to pay Peter, all the while hoping to make enough money to fix the mess, but they're so busy covering up, they never made any money.

It's a lot like those sitcoms where the protagonist hides a secret, like Ben Stiller hiding the fact that he "killed" the dog in "There's Something About Mary", except this ain't funny at all.

A lot of "honest" businessmen end up being Ponzi scammers because they can't admit failure.

Deliberate Fleecers

According to psychologist Stephen Bloomfield, deliberate financial schemers are confident, likable, polished, charming, and not afraid of being rejected. All such are makings of a successful business person.

However, deliberate schemers differ from a normal business person in a significant way: Schemers lack "conscience". They have no empathy to victims. To them, any one who handed over money deserve to be fleeced. In fact, you could say that they are a more subtle version of psychopath.

[ See Are Scammers Psychopaths, or Sociopaths? ]

However, if you confront them, they'll actually say 'they (the victims) know what they're doing, they shouldn't have risked money they can't afford to lose'.

[ See "Caveat Emptor fallacy" ]

One can bounce between two types. An accidental schemer can become deliberate (Bernard Madoff apparently covered up a major investment loss early in his carreer, covered it up through Ponzi, but eventually paid everyone back through some judicious investing, without telling any one), and a deliberate schemer can pretend to be accidental.

In future parts of this series, we'll explore the physical attributes of a Ponzi schemer, and what sort of deception tools they will employ to deceive the unwary.


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