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Illusions and Perceived Wealth: an Agent-based model of Madoff's Ponzi scheme

Author

Listed:
  • Paolo Pellizzari

    (Ca’ Foscari University of Venice)

  • Francesca Parpinel

    (Ca’ Foscari University of Venice)

Abstract

We describe an Agent-Based Model of a Ponzi scheme following the Madoff's case. Agents have an initial propensity to invest in the scam, as the wealth is perceived to grow, whereas it is not invested in any way, and is dissipated by the fraudster. We emphasize that the widening gap between the perceived wealth and the true total money in the hands of the impostor is the key feature of such schemes. If trust evaporates due to the absorption of bad news on the economy, the propensity gradually reverses and an increasing number of agents withdraw their capital (and made up profits). We examine the time needed to reveal the scam and reach a bankruptcy, as a function of the amount of news that hits the market. We also investigate how a special agent named Markopolos (inspired to a real personage) affects the time to bankruptcy, due to his ability to abruptly "convince" to dis-invest the agents he run across. The Markopolos effect appears to be statistically significant, but is quite weak with respect to the outcome generated by a flow of news and the ensuing widespread loss of trust and redemptions.

Suggested Citation

  • Paolo Pellizzari & Francesca Parpinel, 2026. "Illusions and Perceived Wealth: an Agent-based model of Madoff's Ponzi scheme," Working Papers 2026: 04, Department of Economics, University of Venice "Ca' Foscari".
    • Handle: RePEc:ven:wpaper:2026:04
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    References listed on IDEAS

    as
    1. Cortés, Darwin & Santamaría, Julieth & Vargas, Juan F., 2016. "Economic shocks and crime: Evidence from the crash of Ponzi schemes," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PA), pages 263-275.
    2. Volker Grimm & Steven F. Railsback & Christian E. Vincenot & Uta Berger & Cara Gallagher & Donald L. DeAngelis & Bruce Edmonds & Jiaqi Ge & Jarl Giske & Jürgen Groeneveld & Alice S.A. Johnston & Alex, 2020. "The ODD Protocol for Describing Agent-Based and Other Simulation Models: A Second Update to Improve Clarity, Replication, and Structural Realism," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 23(2), pages 1-7.
    3. Jacqueline M. Drew & Michael E. Drew, 2010. "The Identification of Ponzi Schemes: Can a Picture Tell a Thousand Frauds?," Discussion Papers in Finance finance:201008, Griffith University, Department of Accounting, Finance and Economics.
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    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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