After seeing the upcoming film Arbitrage, McArdle explores why we so consistently fall for Ponzi schemes and other forms of fraud:
When money without effort seems within our reach, we don’t require much of a rationale to believe. And we aren’t necessarily too picky about the rationale, either. In 1996 a Ponzi-scheme craze swept the nation of Albania so thoroughly that within a year two thirds of the country had invested in one pyramid scheme or another. The inevitable collapse was horrific. According to the International Monetary Fund, "there was uncontained rioting, the government fell, and the country descended into anarchy and a near civil war in which some 2,000 people were killed."
Shortly after the collapse, writer P.J. O’Rourke went to Albania and interviewed people who had participated. How had they been taken in? Similar pyramids had, after all, already come and gone in Russia. A local newspaper editor explained it to him. "People did not believe these were real pyramid schemes," the editor said. "They knew so much money could not be made honestly. They thought there was smuggling and money laundering involved to make these great profits." Just like those Albanians, some of Madoff’s investors seem to have understood that his purported strategy couldn’t generate the returns he was claiming. So why did they invest? Perhaps because, as O’Rourke notes of the Albanians, they didn’t believe they were the victims of a scam; they thought they were the perpetrators.
And she says all of us are susceptible, a fact that can be seen in the American public's routine investment behavior.
The Dish 