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Current time:0:00Total duration:11:42

Video transcript

you've probably heard the term Ponzi scheme before let me write it down Ponzi Ponzi scheme and what we're going to do in this video is explain what it really is you might have a sense that some type of scam that you're taking one person's money and giving it to another but we're going to a tangible example of how it actually works and right here I have two pictures of the probably the two most famous perpetrators of ponzi schemes this is Charles Ponzi right here it was obviously named after him and then more recently this is Bernie Madoff who pulled off probably the longest lasting and largest Ponzi scheme of all time who knows maybe there's a longer lasting and larger one out there that we had still haven't figured out yet but this is the log the largest one to date and Ponzi wasn't the first person to come up with the Ponzi scheme but they decided to name it after him because he was the first person to really make it famous so this mugshot was taken in the early 1900s where he was when he was finally caught for perpetrating his scheme so how does it work so let's start with some investors here we can get rid of the pictures of these two gentlemen so let's say that I've got a scheme what I'm going to do is I'm going to set up my investors so this is my investors here these are my investors and then let's say we have several time periods so we can see why the investors think at least initially that my scheme is legitimate so let's say that this is the time period so we have period 1 maybe this is years year 1 year 2 year 3 year 4 year 5 and what I'm going to do is I'm going to write each investor and I'm going to think I'm going to write down how much money they think they have with me the person operating the Ponzi scheme and then I'll show you exactly how much money I have and how I can even get away with having the first investors think that I'm legitimate so let's say I have investor a so this is this is going to be their perceived investors perceived let me do this in a different color and Esther's perceived Holdings or perceived value and over here I'm going to write total actual value total actual total actual value so you can imagine this is the actual amount of cash that I have so we have that investor a in blue and let's say in year one he gives me $10,000 and I say I've got a surefire way of doubling his money in the second year so in the second year I actually do nothing with the money and you know I might actually be spending it on my own yachts and you know fancy suits and whatnot well let's just say I'm just keeping it in a bank account so you know he gives it to me ten thousand dollars and I do nothing with that money I don't even get interest on it's not even in a bank account I stuff it into my mattress so the reality is after a year it's still only ten thousand dollars but I promised him that I had some type of a genius scheme that could double his money in a year so I sent him a statement that says that his $10,000 is now twenty thousand dollars is now twenty thousand dollars and I feel good about it because I know that he's going to be so excited that his money doubled and he's going to want to keep his money with me because he'll hope that it can double again and not only he's going to do that but he's going to go to the country club and show off to all of his other friends how he was able to do way better than they did with their investments so he's going to essentially convince other people to join in so let's say he convinces investor B to join in investor B looks at the statement says hey this this this this guy running this one he doesn't know it's a scheme let's say he says Sal seems to know what he's doing he doubled investor a's money in a year I'm gonna give him a bunch of money let's say I'm going to give him fifteen thousand dollars I'm going to give him fifteen thousand dollars in year two so how much total actual value do I have in year two now I have the $10,000 from investor a plus this fifteen thousand dollars so I have the plus the fifteen thousand dollars right there so I have a total of twenty five thousand dollars this is the actual amount that I have in my bank account assuming that I'm not spending it on my yacht or my fancy suits but the total perceived value let me write that down line so total perceived total perceived if everyone actually wanted the amount of money that they thought they had back I would have to pay out thirty five thousand dollars but we know that's not going to happen because people think I'm such a good investor they want their money to ride as long as possible so you already see this discrepancy there's only twenty five thousand dollars in this little pile of money that I'm collecting but people think that there should be thirty five thousand dollars this is their perceived value because this guy thought his money doubled although it didn't it just sat there now let's say that the next year I send them statements at look I made super awesome investments again the money doubled again so this guy's money his perceived value he gets a statement that says you now have forty thousand dollars this guy down here investor B gets a statement that says you now have thirty thousand dollars and then they go back to the Country Club and they get investor C on board they're like look both of us have tried out this guy he's doubled our money two years in a row for both of us you probably want in on this as well as investors he's like yeah you know my two buddies are they look like legitimate guys let me put my money there so he puts in let's say you know let's it gets bigger every time and that's usually how these things go you know you normally only have just three investors you'll have hundreds investors and the more fake positive returns you get the more people that want to put their money in so investor C let's say he comes in and he puts in $20,000 $20,000 so what's the reality let's let's focus on so there's a perception on year three this guy just put his twenty thousand dollars a thinks he's got forty thousand B thinks he has thirty thousand so the perceived value here is forty plus thirty seventy plus 20 is ninety thousand that's the perceived value but the actual value is just going to be this twenty five thousand we had in period two assuming we didn't spend the money or do anything with it plus the twenty thousand that this guy just deposited so the reality is forty five thousand dollars now let's say that as we go from period three to period four or let's say right when this guy gets his statement for $40,000 and the exact same time period that this guy had put in his $20,000 let's say person a he says you know what I felt like my ride has gone long enough I don't want to test fate let me take my money out and you might say oh you know the this is the the skiing will be ruined but it's going to work because enough money is coming in from new investors to pay this guy off we now have $45,000 actual value even though the people think there's ninety thousand so if this guy withdraws all of his money so if he withdraws all of his money so it goes to zero it's a withdrawal I have the cash to pay him I have forty five thousand dollars even though people think there's ninety so I subtract out $40,000 right here and there's only five thousand dollars left in the bank account and since this guy withdrew his money the perceived value add this forty thousand is no longer there I gave the guy the cash the perceived value now is fifty thousand so I essentially Oh people fifty thousand dollars investors B and C think that they have fifty thousand dollars invested with me but the reality is that I only have five thousand dollars in my bank account and probably a more realistic reality is I was probably spending a lot of this money on my own you know my own little luxuries the whole time but let's continue another way you know these guys once again this guy not only have they doubled his money for two years they're all at the same Country Club this guy doubled his money again this guy just invest his money and now this guy says look this scheme is legitimate this legitimized the scheme this is legit because look I doubled my money for two years and I was able to withdraw the money I was able to with let me you know this was a withdrawal withdrawal so he was able to withdraws my so when he goes back to the Country Club he guys he gives this guy and that guy more conviction that this is all on the up and up and then investor D will probably jump in to his says Wow now that he's doubled money two years in a row I see his legitimate investor a was able to withdraw his money I'll give a hole I'll give even more money I'll give a $100,000 I'll give a hundred thousand dollars maybe this is a ton of people who are now going to put in a hundred thousand dollars and then the next year I double the money again and obviously I won't make it exactly double I'll make it you know 40% one year and 30% of the next year so it doesn't look too suspicious I want to make it look like real returns but for the sake of our math let's say I double it again so now and we're in year four I this guy would do all of his money but investor B now thinks he has sixty thousand dollars investor B thinks he has sixty thousand dollars investor C thinks he has forty thousand dollars and investor D thinks he has two hundred two hundred thousand dollars oh and I forgot to put investor DS deposit here so when he put a hundred thousand dollars I only had a five thousand in my bank account but then if I add a hundred I'll now have 105 in my bank account after this guy comes in at you know the beginning of period or at the end of period three we could imagine and what the perceived amount I owe is 150,000 150,000 so the green is what happens after D comes in so these are no longer no longer valid but you can see that as more money comes in I have more and more money to pay out even though I'm not doing anything even though all of these returns are fake so now I actually have $105,000 even though people think well that's at the end of period three at the end of period four what do people think people think that they're that I have $300,000 of holdings let me write that down people think that there are $300,000 of holdings but the reality the reality is I still only have a hundred and five thousand dollars of holdings 105 thousand this is the total actual value but notice if this guy or this guy some of the early investors wanted to pull out some of their money although they probably don't want to because where else can you double your money every year and this guy already showed that I'm good for paying back the money but even if this guy or this guy wanted to pull out their money I would be able to give it to them because I have at least enough for those withdrawals now everything would be ruined if everyone gets freaked out or scared and if if I have mass withdrawals or if more people withdraw money than there is in the bank plus the amount of money that comes in so in order for a Ponzi scheme to keep going and Bernie Madoff was able to do this for a very long time you have to have good believable legitimate returns although they're not legitimate they just need to look legitimate so that you have more money coming in some more in then then out and the thing that both of these you know the whole point of doing this Ponzi scheme if you're you know if you're a stylish criminal isn't just to keep the money isn't just to keep the cash there you know the ten thousand dollars from one period to the next that the whole point of it is to take a lot of that for yourself for you to live off of and put into some Swiss bank account to be able to escape the country at some point anyway hopefully you found that enjoyable
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