Saradha chit fund scam: Why do people still fall for Ponzi schemes?

Gamblers are known for the Double or nothing concept. A similar approach is taken by a financial instrument which is pretty much unregulated by the market regulator SEBI and is popularly known as a Ponzi scheme. A name going around news sites is that of Trinamool Congress MP Sudip Bandyopadhyay. The reason for him being in news is to do with the Rose Valley chit fund scam, which in a lot of ways is a ponzi scheme, similar to the Saradha chit fund scam which was unearthed in 2013 and the Pearls Agro scam in January 2016.

A Ponzi scheme is essentially an investment fraud where money brought in by new investors is used to pay off old investors whose investments need to be redeemed. It lures investors in by promising a much higher rate of return in a very short period of time in comparison to the other investment avenues available in the market at that point of time. Those who get lured to such schemes are mostly from the lower strata, which one could attribute to their lower level of understanding. However, it does not exclude learned people. I had heard of a IIM Calcutta professor who put in his retirement savings into one of the Ponzi schemes only to realise later that it was a rip off.

Smart or silly

I have often wondered why well-educated people with a wide exposure to worldly things tend to commit such silly mistakes. The answer is not simple, but it stems from the complexity they face when it comes to choosing from several options. Leading expert on choice, Sheena Iyengar, writes in The Art of Choosing: “An abundance of choice doesn’t always benefit us...The expansion of choice has become the explosion of choice, and while there is something beautiful and immensely satisfying about having all this variety at our fingertips, we also find ourselves beset by it.”

This is one of the reasons why when good amount of money is to be invested, people spend little time going through product details. Then there is one school which takes too much time to make up their mind and eventually do nothing. The first set tends to take the easy route to trust someone else, who is most often a stranger to put in their money. The blind faith comes from the simple explanation they hear about the investment, which they then believe to be true without any reasoning resulting in a catastrophe.

Rain check

To ensure that no more people are taken for a ride, the Reserve Bank of India launched Sachet (www.sachet.rbi.org.in ), a website from where anyone can get information about companies that are allowed to accept deposits, to thwart the proliferators of Ponzi schemes. You can lodge complaints and share information about illegal acceptance of deposits by unscrupulous entities on this site, making it difficult (not impossible) for ponzi schemes to thrive. But, this entire drive rests on assuming people are net savvy and understand what they are getting into.

To make this initiative meaningful, this venture has been initiated by the State Level Coordination Committee (SLCC), a joint forum formed in all states to facilitate information sharing among regulators such as RBI, SEBI, IRDAI and Enforcement Directorate, to control incidents of unauthorised acceptance of deposits. So, even if you are not yourself an investor, but know of people who are considering investing in such a deposit – help them by lodging a complaint on this site and the local police.

Making a better choice

The Indian mentality to haggle over vegetable prices is well documented, but the same rigour is not shown when it comes to financial consumption. To some extent financial product manufactures are to blame as well because there is too much to choose from. And, more choice not always better. The optimal amount of choice lies somewhere in between infinity and very little, and that optimum depends on context and culture. “In practice, people can cope with larger assortments than research on our basic cognitive limitations might suggest,” Iyengar writes. I completely agree when it comes to choosing a product that is well regulated over one that is not and chosen simply because the benefits were explained in an easy to consumer manner.