The Effect of Greed on Ponzi Schemes

1523 words | 6 page(s)

Executive Summary
Ponzi schemes are a result of public greed. They are the result of public greed tied directly to a sociobiological drive. Investors in Ponzi schemes get trapped because of their own greed and because of the natural design of genes, this cycle is not one soon to be stopped. Fraudulent investments often occur because of inadequate oversight and regulation from financial intermediaries, as well as greedy behavior inherent in individuals. In America, the financial regulatory body was revised after the scheme was publicized in order to prevent further fraudulent investment schemes.
Keywords: Ponzi scheme, Bernie Madoff, SEC, greed

Part 1: Research Problem and Purpose
Ponzi schemes are those with high investments that offer little or no returns. They are often unregistered investments handled by unlicensed sellers. Bernard L. Madoff managed assets for hedge funds, institutional investors, as well as individuals with a high net worth. Bernie Madoff began a brokerage firm in 1960. It became the biggest brokerage firm on Wall Street. He began to invest money as a favor to his friends and his family members in spite of the fact that he was not licensed to do so at the time. These side investments, over the course of the next fifty years, because investments fund that grew into a $50 billion Ponzi scheme. In 2009, Bernie Madoff pleaded guilty to the crimes without trial for which he was sentenced to 150 years in prison. Middle class individuals lost pensions, wealthy clients lost their savings, and philanthropic organizations lost their investments as everything involved in this scheme was laid to rest (Henriques, 2011).

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One of the biggest reasons why this happened was the SEC. It was revealed that Madoff was able to avoid problems for an extended period of time because the SEC had, over time, disciplined eight employees for their handling of different Ponzi schemes. This action resulted in an internal investigation that reviewed how six warnings, collected over the previous 16 years regarding Madoff could have been avoided. The scandal was due to inexperienced staff at the SEC and delayed examinations. Critics claim that the SEC is regularly understaffed and often unable to handle the workload placed on them, which can hinder their ability to stop fraudulent activity in the future (Rouse, n.d.).

But the SEC errors are not the only factors that allowed such activity to take place. America is an individualism nation, as outlined by the Hofstede Centre. It is one wherein people focus on themselves and their immediate family, not focused on the well-being of others. Americans also focus on self-interest and individual success, rather than group success. Individual greed embedded in the culture would easily cause the misfortune of others, or even the thought of others failing to achieve success, to be overlooked easily for the sake of individual success (THE HOFSTEDE CENTER, n.d.). This greed is driven by biology as well as national cultural norms.

The world seems one full of endless scams that involve controlling greed and money. Greed is not restricted by culture, it is something global. Sociobiology states that all actions are dictated by the genes’ need to survive and replicate at any cost (Dawkins, 1989). This can easily be used to explain that greed, in spite of it being harmful in some cases, is something significantly important to the replication of genes, as more money means better standards of living which enables better survival. Individuals are all programed to think and to behave in such a way that would increase the reproductive success of genes, and gaining more money at any cost is just one way to make sure this happens.

Sociobiology also states that individuals, dictated by their genes and need for survival, will survive and attempt to increase their presence at the expense of those who are less adapted. This is why all involved in Ponzi schemes are not victims, but all attempting to make themselves better than those below them, to set themselves apart, and to allow their genes the opportunity to survive and replicate (Hofstede, 2002). The purpose of this research is to determine the rate at which greed will affect behavior.

Part 2: Hypothesis Methods
We will gather at least 20 subjects for the experiment. All will be college students who were friends or people on campus in an attempt to provide a representative sample of students other than our university students. Once they are recruited, they will be presented with the consent form and asked to read the form, decide whether they wanted to participate, and then sign the form and return it. All students will be told to show up at a specific appointment time in a specific classroom. There will be two test groups working at different times. Group A will be seated across from other students. Group B will work alone. A coin will be flipped to determine which student ends up in which test group.

Upon arrival, Group A will be seated across from other students and asked to fill out a questionnaire with basic questions on math, science, and history. For each correct answer the student will receive points. Group B will work at individual desks. They will be asked to fill out a questionnaire with basic questions on math, science, and history. For each correct answer the student will receive points.

At the end of the procedure, students could choose to take home $.10 for every right answer. Or, if they choose to share with another participant, they would each be given $.15 for the total number of right answers earned by the first student. This experiment will test whether individualism and the sociobiological drive to succeed extends to not just trying to succeed, but in hurting someone else in order for you to succeed. Students who are willing to share will take home more, but that also means another student will succeed. Students who want to avoid helping someone else succeed will make less, but at the expense of someone else making less. The two test groups are designed to see if actually seeing the other person, with whom you could share winnings (the person sitting across from them) will influence their greed. Their choices will be marked at the top of their test so that data can be collected.

Upon completion of this section, subjects will be asked to indicate their gender and ethnicity. This will allow for us to analyze outcomes based on any of the aforementioned specifics, attributing our results to cultural as well as gender appropriate similarities and differences. After collecting all of the forms from participants, we will enter all of the responses into a spreadsheet for later analysis.

Part 3: Sample Results and Discussion
The hypothesis will be tested by analyzing the collected data with five statistical analyses: 4 independent t-tests and a mixed factorial ANOVA in SPSS. Of the surveys collected, we will analyze the rate of greed among those who participated, comparing the two groups and reviewing whether the results are statistically significant. We will repeat the measures with one level of variable for sex. The interactions between the variables will be displayed within the confines of the two groups. The same tests will be run within a separate analysis for male and female participants, producing an overall outcome of two groups.

The findings may be indicative that biological greed and the natural individualistic desire of students on an American campus will cause individuals to be greedy. Gender is not likely to greatly affect the studies such that men or women would have overall higher or lower rankings. The research will carry with it clear support of our hypothesis that Ponzi schemes are the result of public greed tied to a sociobiological drive. The content of the research will not contain enough information regarding an individual’s upbringing or social networking to determine whether they are more or less individualistic or altruistic compared to other students. Naturally, it is not as simplistic to analyze this from the given information and a new test could now be conducted based on our findings but focusing more on discovering a person’s background through smaller questionnaires prior to having them conduct the study. The review of said information would be much more difficult to interpret as it would not be simple data collection.

Obviously the next step for this research in the future is twofold. The first is a bigger analysis on the subconscious upbringing within society; the implications from birth that being a “winner” is better, even if you succeed at the downfall of another. The second could be obtaining on a more meticulous level, information directed at whether Americans, in their individualistic society, are more prone to sociobiological greed compared to other countries.

  • Dawkins, R. (1989). The selfish gene (New ed.). Oxford: Oxford University Press.
  • Henriques, D. (2011). The wizard of lies: Bernie Madoff and the death of trust. New York: Times Books/Henry Holt.
  • Hofstede, G., & Pedersen, P. (2002).Exploring culture exercises, stories, and synthetic cultures. Yarmouth, Me.: Intercultural Press.
  • THE HOFSTEDE CENTRE. (n.d.). Retrieved February 23, 2015, from http://geert-hofstede.com/countries.html
  • Rouse, R. (n.d.). Devastating report on SEC madoff failure. Journal of Corporate Accounting & Finance, 87-89.

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