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Here's an idea about how data scientists could make a living as a self-employed entrepreneur:

Use an official index that measures what it costs, on average (per year), to attend University in US. Create a company that will sell shares on a private market, related to this index. When people are very confident in the value of a University degree, this index should go up. And conversely.

Manage this business as follows:

  • Holding period: anyone who purchases "shares" must hold them for 6 months before selling
  • Offer an 8% yearly return MAXIMUM (not guaranteed), with MINIMUM = you lose the principal. Just like the stock market.
  • Pay people who withdraw money using money from newcomers (this is what makes it a Ponzi scheme)
  • To avoid false advertising lawsuits, clearly state that return could be much lower than 8%, or that you could lose everything
  • Use an OFFICIAL "University cost" index to build trust
  • Tell each potential investor that this is a Ponzi scheme to avoid lawsuits
  • Tell each potential investor that only smart or lucky people will win, all others will lose some or all of their invested money
  • Don't benefit from this business, except by charging a small fee when people sell

Question:

Is this Ponzi scheme worst than:

  • Social security that use younger generations to pay retirement benefits to older generations?
  • Stock market that exploded in 2000, and again in 2008?
  • 401 and other retirement plans?
  • Human population artificially inflated growth?
  • Bubble related to education costs?
  • Bubble related to healthcare costs?

Unlike most Ponzi schemes, this one has no criminal intent, since all participants are immediately told that they are investing in a Ponzi scheme. Also, there are mechanisms in place (low guaranteed return, holding period) that will make it stable for many many years (like social security) before it blows up.

What do you think? And what are the optimal parameter values to make this scheme lasts as long as possible?

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Comment by Oleg Okun on October 9, 2012 at 11:49am

Vincent, why does one need to be a data scientist in order to run such a scheme?

I also think that regardless of whether participants are warned beforehand that they may lose or not, any such schemes are punishable by law. The only exceptions I know are state-run lotteries. But no state will tolerate competition in this business.

Comment by David Johnston on October 7, 2012 at 10:59am

I don't know about this particular idea but I am interested in the idea of open ponzi schemes . Could the model of the ponzi scheme be put to some altruistic use? Could it be used to bootstrap some good idea and give it fast and wide traction in society where traditional forms of marketing/popularization would fail. For example, how do you start a dating or any social network site with no initial members? It seems that you have to provide some other incentive at the start besides the value you will eventually provide from the network effect of your group.  Anyone know a possible model for that? Could a ponzi scheme be the answer?

Comment by Vincent Granville on October 6, 2012 at 10:45pm

@Ted: social security participants do get valuable benefits as long as population grows. When it starts shrinking (which will eventually happen - there's not enough room for 20 billion people on this planet), then the bubble will pop. It's started to happen in countries such as Japan or Italy. In some countries (e.g. Greece), people are fighting hard against new policies that postpone retirement age from 63 to 65. 

In that respect, my proposed Ponzi scheme works the same way. For a few years, we would have happy participants regularly receiving financial benefits. At one point, like all bubbles - whether or not labeled as Ponzi - it would pop in the same way. The big difference with social security being that participants are explicitly being warned that this is a Ponzi scheme that will blow up one day.

Comment by Ted Sanders on October 6, 2012 at 8:50pm

The difference is social security participants, retirees, and stock market investors perceive valuable benefits such as some ROI.  In your scenario their is no suspension of reality - even though disclosing it's a Ponzi scheme may not eliminate liability.  Isn't the Ponzi scheme disclosure on the Madoff funds and on the W-4 - maybe I should check the fine print?   

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