The Ponzi and the Caveman ~ Brand Mix

Tuesday, December 16, 2008

The Ponzi and the Caveman

In light of what may turn out to be the biggest Ponzi scheme in history, NPR asked the question: Why are people so prone to making irrational decisions when it comes to money?

It may be that our inner caveman is to blame. There's an old part of the brain that responds to things like food and water and other sustenance. When big rewards are within reach, this part of the brain gets all worked up and takes control.

As Camelia Kuhnen from the Kellogg School of Management describes, casinos have long figured out how to activate this: "When you enter into a casino floor, you are surrounded by cues of potential reward. Free food, free drinks, beautiful people walking around scantily clad. And those sights of potential reward will increase activation in the brain's reward area which will make you take more financial risk. You're going to gamble more at the roulette table."

Same thing for Ponzi schemes and bubbles. The possibility for enrichment taps into a deep desire not coming from the most rational part of the mind. As the report points out, no-one is immune for this. In fact, the most likely victims of financial scams are college educated, married, male, earning above the median income and financially literate.

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