Ponzi schemes are financial frauds that are pervasive throughout the world. Since they cause serious harm to society, it is of interest to study them so that they can be prevented. Typically, a Ponzi scheme is instigated by a promoter who promises above-average investment returns. He uses funds from the early investors to pay his later investors. These scams can occasionally last a long time, but they are ultimately unsustainable. This paper describes some well-known Ponzi schemes and identifies their common characteristics. We also review some of the approaches used to model Ponzi schemes.

Ponzi-like investment schemes were popular in many transition economies. Often, some government officials had inside information about the viability of such schemes and used this information to their own advantage. We introduce a novel experimental design that allows us to study the extent to which this kind of abuse of information is possible and what consequences it has for those without such information. In particular, we investigate how the proportion of informed versus uninformed investors and the promised dividends affect the way in which informed investors can exploit the investments of uninformed investors. Our results show that uninformed investors follow the observed choices of the informed even more than predicted by theory. This adds to the devastating effects that this kind of underground activity can have on the uninformed.