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Why are people trapped in Ponzi and pyramid schemes?

Taofik Hidajat (Department of Management, Sekolah Tinggi Ilmu Ekonomi Bank BPD Jateng, Semarang, Indonesia and Faculty of Economics and Business, Universitas Padjadjaran, Sumedang, Indonesia)
Ina Primiana (Faculty of Economics and Business, Universitas Padjadjaran, Sumedang, Indonesia)
Sulaeman Rahman (Faculty of Economics and Business, Universitas Padjadjaran, Sumedang, Indonesia)
Erie Febrian (Faculty of Economics and Business, Universitas Padjadjaran, Sumedang, Indonesia)

Journal of Financial Crime

ISSN: 1359-0790

Article publication date: 24 August 2020

Issue publication date: 24 August 2020

Abstract

Purpose

This paper aims to identify psychological factors that influence people to be involved in Ponzi and pyramid schemes.

Design/methodology/approach

A psychological approach to finance or behavioural finance is applied in this research because of the assumption that human beings are not always rational. The sample consisted of 98 investors in 11 cities in Indonesia who were or had invested in an investment program with a Ponzi or pyramid scheme. The snowball sampling technique was applied.

Findings

The conclusion is that optimism (emotional bias), confirmation bias, representativeness bias, framing bias and overconfidence (cognitive bias) positively influenced investment decisions related to Ponzi and pyramid schemes.

Originality/value

The novelty aspect of this research is the implementation of a behavioural finance perspective to answer and express the fascinating phenomenon of Ponzi and pyramid investment schemes.

Keywords

Acknowledgements

Special thanks to Tongam L. Tobing, Chair of the Investment Alert Task Force, and Dhani Gunawan Idat from Financial Services Authority (OJK), for valuable discussions and suggestions.

Citation

Hidajat, T., Primiana, I., Rahman, S. and Febrian, E. (2020), "Why are people trapped in Ponzi and pyramid schemes?", Journal of Financial Crime, Vol. 28 No. 1, pp. 187-203. https://doi.org/10.1108/JFC-05-2020-0093

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited