How to avoid Ponzi schemes; Learnings from Adam Smith
By: Ibrahim Babayemi
Tags: Behaviouraleconomics, Investing, Ponzi Scheme, Human Behavior

In a world of Elon Musk, HODL, Social Media, Profit, etc, and the current pace & tempo of the global financial system, the opportunity to make money has never been this easy, or so it seems. Our consciousness are littered with glamorous success stories of young people who, before now, were literally struggling financial freedom. Tales of how young chaps are climbing the millionaire table and even inviting their pals to join them.

“Calculated high-risk appetite”…. That’s what appears to be the success drivers of these newly minted millionaires and since the world is a very dynamic one, maybe financial success, at least for this generation, is only for people who are ready to sink or swim. Even if it’s that risky, what’s there to lose? After all, our folks advised that we try and make all the mistakes there is while we are young, so; whatever happens as we try to make the trip to becoming financially free within the shortest possible time…. At worst, we’d have learnt.

But how do we suddenly start thinking that it’s normal for us to throw some money somewhere, go home and relax, expecting 30, 50 and sometimes 100% “guaranteed” return in one month? This is especially in a society where the risk-free return on money is very well less than 5% per annum.

It appears Adam Smith (A.S) may have explained something related to this in some of his past publications. One of those, The Wealth of Nations, may prove to be useful for this inquiry.

In the book, A.S talked about how we got to this current state of capitalism which he described as commerce. He talked about the four stages of society as being Hunting, Pasturage, Farming and Commerce. Notably, according to this thought, humans started off as hunters.. I therefore think humans should not be blamed for using the hunting spirit to seek very handsome financial returns.

A.S would later touch on how humans view actions and inactions. Here, he used a concept called “Fellow-Feeling” to describe how humans manage to put themselves in the shoes of others to judge their actions. Since humans judge others, they also expect to be judged in return, thus they they act in a way and manner that would attract good judgements of their fellow humans. It should therefore be unsurprising that humans, by default, often act so as to be admired by other humans.

Knowing that humans are predominantly hunters and they often want to be admired, it becomes a bit easier to understand that financial actions taken due to fear of missing out (FOMO), may not primarily be connected to the promised huge financial returns but may in fact be connected to the fear that an individual who doesn’t partake may be seen as weak or foolish for being unable to harness simple opportunities which may deny such person the admiration that s/he desperately want.

A.S, in his book, insinuated that human’s efforts at making more than is enough for subsistence is more connected to the admiration from fellow humans that such attainment would bring than the concept of leaving enough for the next generation.

Having known this, what can you do to avoid getting into this constant trap of scammers in a bid to make the best of your money?

Review your circle: While there are many ways to hear about a Ponzi scheme, the biggest driver of action appears to be a confirmation or participation of a friend or acquaintance. Confirmation that a close person got paid or is participating, is what an average person needs to jump on the ship. A pointer to the fact that participation may just be an attempt to not be left behind or to keep/acquire the admiration of people around us. Get some financial Education: A basic knowledge of the financial world is enough for you to know whether you’re gambling or investing. Even as a gambling investor, sound financial knowledge lets you understand the kind of risk you’re getting into, if you are expecting certain returns. Do your Due Diligence: Anyone can build a website with less than $100, anyone can take pictures of a farm or of a laptop screen showing some financial market charts, anyone can claim anything especially in a country with weak regulatory and justice system. The onus is on your to do you findings to ascertain what you’re getting yourself into.

If you work on the 3 points above, your chance of being caught in a Ponzi may be reduced by over 90%. ..and if you’re thinking about how you can perfectly avoid it? Well.. I’m sorry to tell you that I may have no idea as the very world we are currently inhabiting may be a very big fat Ponzi scheme.

Cheers!