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So, What Are They?
A simple definition of a Ponzi scheme is taking from one investor to pay another. Initial investors usually get their returns but more and more dupes are needed to keep the fraud going and, eventually, it crumbles revealing the plot and leaving some poor slobs broke. Ponzi schemes have always been in the news and, for better or worse, this fact presents a teaching opportunity for economics and social studies teachers.
This article offers an economics lesson plan on the skullduggery of Ponzi schemes. The assignment can take weeks and may lead to some chaotic class sessions, but it’s fun, educational and can teach a lesson not easily forgotten. The financial forms used are simple and calculate a monthly rate of return. More advanced classes might want to consider calculating the APR and APY. (If possible, begin this project on April 1st and see if the kids make the connection to April Fool's Day by the end of the assignment.)
Ponzi schemes take their name from Charles Ponzi, who ran the first one in 1919. Mr. Ponzi promised investors outrageous returns in a short period of time by claiming he could take advantage of the difference in currency values through buying and selling international mail coupons. Investors were sold on his plan of purchasing the coupons in foreign countries at a low price and selling them for much more in the U.S. In truth, Ponzi only bought about $30 worth of coupons and kept most of the money for himself.
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Ponzi Scheme Lesson Plan
- You will need one class period to begin this assignment and about thirty minutes each week for follow up. It can last about four to five weeks. For purposes of this assignment, each week will be considered a month.
- Divide the class into 7-12 groups (the rest of the lesson should help you determine the right number for your class.) Groups of about three work well since it's best to have as many groups as possible.
- Provide each group with information about an investment opportunity called Thin-Cups and choose one group as the managers of the investment (Group 1) and two other groups that will be allowed to invest right away. The remaining groups will have to wait until the following week for their chance to invest in the amazing Thin-Cups.
- Group 1 should be told it’s a fraudulent investment and that they will withdraw their salaries and returns on investments from the money they take in. Group 1 must keep this a secret. Provide them with a simple managers’ ledger to keep track of income and disbursements (salaries should equal 100 percent of what they collect from investors each week. They should pay Week 1 investors with money from Week 2 investors and so on.)
- The other groups are given a balance of $1,000 which they can invest as they choose. Money they don’t invest in Thin-Cups will be placed in a savings account earning 5 percent monthly. Each group should get a ledger for tracking their monies.
- After the assignment is explained and groups are chosen, give the class time to discuss how they are going to invest group funds. By the end of class the two select groups should inform Group 1 of their choices and all ledgers should be updated and turned in.
- Each week Group 1 must pay earnings as if it is a new month. A report of each group’s earnings should be presented to the class.
- Groups 2-12 must keep track of any interest earned on savings accounts. Each group must make weekly decisions about investing more or withdrawing funds and keep track of everything in their ledgers.
- All work should be done in class.
- Wait for the Thin-Cups to crumble, (i.e.-Group 1 can no longer pay its investors), and then explain Ponzi schemes to the class.