Ponzi Schemes and Making Decisions

Judgment in Managerial Decision Making: The Ponzi Scheme

Everyone makes decisions, both good and bad, throughout their lives. Recently, there has been quite a bit of talk about the bad decisions that businesses and their executives have made. Issues like the stock market and sub-prime mortgage issues have financially devastated some people, as have Ponzi schemes. These types of schemes create fraudulent investments that seen to offer great rates of return (Dunn, 2004). Instead of investing, though, the person running the scheme is using the investment money from new investors to pay the "dividends" of previous investors. More and more money is needed to sustain the scheme, but by the time everything collapses the original person running the scheme has pocketed and/or spent a huge amount of money (Dunn, 2004). Many people have been jailed for Ponzi schemes, as most people do not get away with them for very long because they eventually have to stop paying investors since they really do not have the money to continue the scheme forever.

The largest Ponzi scheme in history was undertaken by Bernie Madoff, who was a former financier, investment advisor, and stockbroker who was convicted of fraud (Frankel, 2012). A massive number of people were affected by his scheme, as they did not realize the risk they were taking. All they saw was that they were making a good rate of return, especially when compared to other investment options. The gains Madoff was claiming to deliver to his investors were not even mathematically possible, but attempts to get the SEC interested in that finding were ignored in 2000 and 2001, as well as in 2005 and 2007 (Frankel, 2012). Financial analyst Harry Markopolos was behind the information provided to the SEC, and dealt with 10 years of frustration and being ignored despite all the evidence he presented regarding Madoff and his truly impossible rates of return on his alleged "investments" (Frankel, 2012) In 2008, Madoff confided in his sons about the Ponzi scheme, and they reported their father to authorities.

One thing is clear about Ponzi schemes. They do not work unless people make decisions to engage in nefarious activities, and unless other people make decisions to invest in them (often not knowing they are schemes, of course). People who create Ponzi schemes generally make the decision to do so because of the amount of money they can receive from people investing in what they believe is a legitimate company or stock. Then the person who created the scheme takes most of the money that people "invest," and uses the money from new investors to pay the former investors. Even with some of that money being paid out, the person running the scheme can make a massive profit as long as there is a steady and growing influx of new investors (Dunn, 2004). The decision a person makes to start a Ponzi scheme is done knowing that it is illegal and that a number of people are going to get cheated out of their investment (Dunn, 2004). The people who invest are often much more innocent in that they do not know the investment is not real. They may be suspicious of how they can get such a large return on their investment, but many people do not give that much consideration.