Criminal Justice

Are Ponzi Scheme Victims Partly to Blame for Their Losses? Law Prof Sees Some Gullibility

When people who eat too much and smoke eventually succumb to heart disease, many would agree they bear some responsibility for the illness, according to Boston University law professor Tamar Frankel.

Can the same comparison be made to victims of Ponzi schemes? In an interview with the New York Times DealBook blog, Frankel sees parallels. “I empathize with victims and I feel for them, even as I assign some responsibility to them,” she says.

Frankel considers the psychology of financial criminals, including Bernard Madoff, in her new book The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims. In the interview, she answered a question about where to draw the line between unjustified trust and unreasonable gullibility.

“Gullibility is the tendency to believe without reasonable evidence,” Frankel said. “Every culture draws a line between trust and gullibility. And in the financial arena, the line between trust and gullibility may have to be more tightly drawn. For example, as I note in my book, many con artists make it seem that they are limiting access to their investments, making them available only to a select few. Now, rationally, why would a money manager do that? Look around you and you see hedge funds, mutual funds, private equity funds and advisers all salivating for more clients. Yet, there are those who believe that the more unique and hard to get an investment is, the more valuable it is. That’s gullibility—because it is not rational to believe that.”

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