Ponzis and Pyramids

Please delete this version!

Mistakes have been rectified in later version

Wikipedia defines a Ponzi as follows

A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation.

 The Ponzi scheme...

.....entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent.

Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going.

 Ponzi schemes are not a product of the Internet, in fact Charles Dickens was referring to a very similar scheme in 'Little Dorrit' a hundred years before the internet was invented.

The scheme is named after Charles Ponzi who famously used the scheme in the first quarter of the twentieth century - again well before the invention of the internet.

 The scheme inevitably collapses eventually, but only after a lot of otherwise sensible people have lost their money. When the scheme is wound up there is rarely much in the way of tangible assets for the receivers to recover and pay-outs to duped investors are usually minimal.

 The fact that the scam was created more than a hundred and fifty years ago does not mean that it is no longer a danger. Bernie Madoff scammed $65 billion and traded for more than thirty years before he was eventually caught and sentenced to 150 years imprisonment.

 Like most of the big-time operators he built a larger than life persona and appeared to be an example of probity and respectability. Bernie was a former Non-Executive Chairman of NASDAQ. Allen Stanford another convicted Ponzi builder was even given a Knighthood by the Queen of England. It has since been rescinded.

A Pyramid Scheme....

 is something similar. Many have a basic product that they purport to sell - like detergent - but for members of the pyramid the main reward is gained by recruiting others to the scheme. Each new recruit pays for membership and that money is shared between the recruiter, his or her recruiter, and so on right up to the top of the scheme where the Pharaoh gets his cut.

 Those who join early, and recruit successfully do well for a while but with little real activity - just a few bottles of detergent sold - the scheme inevitably collapses and the latecomers loose out.

 The Ponzy and the Pyramid share the same business model: that it is possible to expand indefinitely. Neither has a genuine wealth generation business model at its core and both sentence the late-comer to losses and embarrassment.