Q&A with Professor Tamar Frankel, author of The Ponzi Scheme Puzzle

On Ponzi schemes, con artists and her new book

tamar frankelWhy do investors continue to fall for Ponzi schemes? According to BU Law Professor Tamar Frankel's new book, The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims (Oxford University Press), scams of this kind are flourishing 90 years after Charles Ponzi perpetrated his infamous swindle.

Frauds of this type—such as those of Allen Stanford and Bernard Madoff—can involve staggeringly large amounts of money. Others of varying magnitude appear around the globe.

"Ponzi schemes and investment frauds seem to have reached the proportion of an epidemic," Frankel writes in the introduction to her book, which analyzes the reasons Ponzi schemes have been successful and the character traits of con artists and their victims. We asked Frankel a few questions about her research and conclusions.

What did you learn in your research that surprised you the most?

The main surprise was the seemingly "normal" behavior of the con artists. Con artists' activities are similar to those of legitimate salespersons and entrepreneurs. In addition, legitimate businesses may end as Ponzi schemes. These similarities make it hard to distinguish the fraudulent from the legitimate.

How is it that people still fall for these schemes, despite often being highly educated, sophisticated investors?

Many features of these schemes draw attention—the offered returns (at no or low risk) are astounding. The stories are innovative, raising excitement and admiration, even though they are hard to verify. And perhaps our culture may strongly support belief in quick riches.

Your book analyzes behavioral patterns. What character traits stand out to you most about victims?

Studies suggest that a strong tendency to trust, risk tolerance, belief in one's own ability, and desire for belonging to an exclusive group may bring attraction to these schemes. These tendencies are not bad in and by themselves, but together they may create vulnerability to such schemes.

You write that self-awareness is an effective way to avoid falling prey to a Ponzi scheme. Why is this effective, and is it the best way of protecting yourself?

Law might be effective in punishing con artists after the fact, but is weaker in deterring. Warnings to the potential investors do not seem to be sufficiently effective. So perhaps self-awareness may serve as an added protection. If I know my weakness and am determined to control it, it may help. If I have strong craving for sugar and know that it is bad for me, I can avoid having sweets in the house. Self-awareness is not the only protection, but it might add protection.

Will Ponzi schemes go away any time soon? Are there any actions we can take to stop their prevalence in society?

I believe that the answer to the first question depends greatly on the answer to the second question.

A society protects itself against destructive anti-social behavior in a number of ways. One is a strong ethical and moral tendency of its members, including its leaders. Another is the pressure and limits by its Court of Public Opinion. A third may be the constraints of culture. It is not a culture which accepts that "everyone does it." It is a culture which emphasizes that "no one does it." And then there is the law. And, in addition, there is the self-protection that derives from self-knowledge of one's tendencies.

Perhaps America could become a bit more questioning, more inquiring and more skeptical. If America strengthens self-protection, rejects "everyone does it" in its culture, and develops a more active Court of Public Opinion against dishonesty, America might reduce, if not eliminate Ponzi schemes.

Reported by Chelsea Sheasley
August 15, 2012

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