Abstract:

Ponzi and pyramid schemes promise a large return for investors with limited risk. In reality, most investors lose money when such schemes collapse due to a lack of new entrants. In an online experiment without deception, we invite participants to invest their endowment in a pyramid-like investment scheme with a negative expected return. We find that more than half of the subjects are willing to invest in the scheme regardless of their age, gender, years of schooling, trust levels, and income. Complexity of the decision-making in the pyramid scheme plays an important role in investment; the size of the group, difficulty of calculating average payoff outcomes as well as the percentage of losers contribute to complexity. Risk tolerance and preference for positively skewed outcomes partially explain investment decisions. Our findings suggest that pyramid schemes can be attractive even in the absence of deceptive recruitment efforts by scheme founders.