Ponzi Scheme: Important Topics for UPSC Exams
What is a Ponzi scheme?
How does a Ponzi scheme?
Suppose that there is a company XYZ which sells products in the healthcare
industry to only those people who are either the employee of the company or
related to them. Now suppose for every sells that happens the profit goes from
top to bottom in the ratio of the relationship linkages. Therefore suppose is
CEO of the company then he/she will get the maximum benefit then the next guy to
him/her will get the benefits and it will continue like that. At the end of the
cycle, the people who invest in the scheme at the end will get paid very less as
compared to other people and further if sells do not happen up to say certain
quantity 10000 then the one responsible for it won’t get paid. But here, other
guys above to him/her will get paid because they must be having 3-4 people below
them to complete their required number.
Thus eventually, profit erosion start from the last leg of people who invest in
the scheme and the promoters get the maximum benefit for a long time.
- In 2008, the largest Ponzi scheme in the history, led by financier Bernard
Madoff was caught. The scheme duped investors of almost $65 billion over a
period of 17 years.
How did Ponzi schemes get their name?
- It was named after Charles Ponzi, who duped thousands of people in a postage
stamp speculation scheme back in the 1920s.
- Ponzi promised investors that he could provide a 50% return in just 90 days
whereas in those days bank interest rates were only 5%.
Impact of such schemes in society
- Many people get duped and they loose their hard earned money by investing in
- If such schemes spread to very large people it may impact the financial system
and therefore trust of people in the financial system may decline.
- Moral degradation in society since people gets inspired for huge gains with
little risks and thus may cause negative behaviour development and that will not
be good for the larger society in the long term.