bus.dec.lec.25

bus.dec.lec.25 - Pyramids and Ponzi Schemes Business...

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1 Pyramids and Ponzi Schemes Business Decisions SOC 138/ECO 149
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2 The Price of Human Folly, Redux From the cold Antarctic wastes to the steamy swamps of Florida, we have seen that poor decision making can exact a heavy price Today, we turn to two recurrent scams which siphon millions of dollars each year Both exploit herd behavior and cognitive biases to profit from the unwary Understanding how – and why – these scams work will both improve your grasp of decision making in general, and (perhaps) help keep you from being victimized
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3 Charles Ponzi and Friends In late 1919, one Charles Ponzi began offering Bostonians an investment opportunity Notes issued, redeemable at 90 days with 50% interest Claimed to be based on “international securities” (postal reply coupons) By July of 1920, Ponzi was estimated to be taking in over $250,000 per day in Boston alone! Ponzi hailed as “financial genius,” “the people’s financier” Despite obvious problems with his story, Ponzi wasn’t discovered and shut down until August of 1920 Thousands of people involved, millions of dollars lost, 6 banks failed, etc. Massive payoffs based on paying out redemptions with revenue from new issues – no postal reply coupons involved Scheme wasn’t even new – William “520%” Miller convicted in 1903 for similar scheme
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4 How the Scheme Works At time t , n notes are issued at a cost of $ m each, which are redeemable for a payout of $ rm at time t +1 r is usually large, e.g 1.1-1.5 for short time spans
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This note was uploaded on 01/17/2011 for the course ECON 149 taught by Professor Sohrabian during the Fall '08 term at UC Irvine.

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bus.dec.lec.25 - Pyramids and Ponzi Schemes Business...

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