Rephrasing Illusions: an Agent-based model of Madoff’s Ponzi scheme

In light of the Madoff case, we present an Agent-Based Model of a Ponzi scheme. Agents are initially inclined to invest in the scam because they believe the wealth will increase, even if the fraudster dissipates it without any investment. We stress that the main characteristic of such schemes is the growing discrepancy between the perceived wealth and the actual total amount of money in the impostor’s possession. The tendency gradually reverses and more agents withdraw their wealth (and made-up profits) if trust is lost as a result of hearing negative news about the economy. We look at how long it takes to expose the fraud and file for bankruptcy in relation to the volume of news that enters the market. We also look into the impact of a special agent dubbed Markopolos (inspired by a genuine personage) on the time to bankruptcy because of his capacity to quickly "convince" the agents he encounters to disinvest. Although the Markopolos effect seems to be statistically significant, it is not very strong when it comes to the results of a news flow and the subsequent widespread loss of faith and redemptions. (You may also look at the Appendix at this stage).