ManticajonAnatomy of a scam
In my last column, I wrote that to address the decades-old problem of financial fraud, Ponzi schemes, and the like, we must carefully examine the conceptual, structural, legal, and cultural causes of their continued prevalence.
A study done in Nigeria by Jack and Ibekwe (Nigerian Journal of Sociology and Anthropology, 2018) showed that Ponzi schemes are a coping strategy for an economic recession. When people are faced with financial distress, its negative effect on them goes beyond material well-being. It also erodes their self-esteem and self-confidence. The other side of this is overconfidence, especially when looking at events which depend on chance by a large part.
Desperation also plays a significant role. Jack and Ibekwe cited the study done by Bupo and Abam-Smith (2017), which showed that Ponzi scheme participants agreed that Ponzi schemes legitimately increased their income and reduced the impact of the economic recession on them. They are aware that Ponzi schemes are scams “that will surely crash, but that the durability is based on the continued joining of more people.” In our locality, it’s common to hear the phrase “mangyawat nga makakwarta.”
The following are the characteristics of all Ponzi schemes, according to experts: (1) Offering of abnormal profits and, in fact, actually paying early investors with enormous sums of money; (2) Desperate search for new investors that will sustain the scheme; (3) Collecting from later investors to pay early investors; (4) Spreading testimonials from those who have benefited from the scheme; (5) Pushing current investors to invest more in order to keep the scheme from collapsing too early; and (6) Enticing people with referral bonuses to introduce more investors.
The rationalization for joining such schemes usually involves blaming banks and the mainstream financial markets for their low-interest rates, "forcing" people to place their money in the hands of those who promise them “the best returns” which is actually the equivalent of “the moon and the stars.”
Using the lens of Merton’s Strain Theory (Ritzer and Stepnisky, 2014), researchers argued that when individuals are strained by financial hardships, they either conform, innovate, ritualize, retreat, or rebel. In many cases, people innovate – accepting cultural goals (financial security) but rejecting the socially approved means of achieving those goals (education, hard work, ethical values).
The case of investments scams is an example of a structural strain such as economic recession that pushes people to “innovate and adopt unconventional means of achieving cherished societal goals like financial security or success.” In the face of limited legitimate opportunities to advance in life, people contribute to the proliferation of Ponzi schemes despite being aware of their risks.
Clamping down on companies and organizations that solicit funds from the public in Ponzi-like investment schemes, therefore, just scratches the surface of the problem. The government must continue to embark on programs and projects that lead to economic growth, that benefit not only a few but the majority of citizens.
The current model of trickle-down economics that mainly benefits only large corporations only further strengthens the strong and further weakens the weak. But strengthening our agri-industrial sector, for one, will provide diverse economic opportunities to our people in the countryside. Investing in infrastructure, for another, where decisions are based on science or empirical evidence and not on patronage and corruption, will go a long way in uplifting our people from poverty. Those are a few long-term solutions.
The short-term solution against financial fraud, aside from strict law enforcement, is to keep on reminding the public about the risks and evils of Ponzi schemes and the like.
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