IDEAS home Printed from https://ideas.repec.org/p/ven/wpaper/202610.html

Rephrasing Illusions: 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

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.

Suggested Citation

  • Paolo Pellizzari & Francesca Parpinel, 2026. "Rephrasing Illusions: an Agent-based model of Madoff's Ponzi scheme," Working Papers 2026: 10, Department of Economics, University of Venice "Ca' Foscari".
    • Handle: RePEc:ven:wpaper:2026:10
    as

    Download full text from publisher

    File URL: https://www.unive.it/web/fileadmin/user_upload/dipartimenti/DEC/doc/Pubblicazioni_scientifiche/working_papers/2026/WP_DSE_pellizzari_parpinel_10_26.pdf
    File Function: First version, anno
    Download Restriction: no
    ---><---

    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. Boyle, Phelim & Peng, Zhe, 2025. "Ponzi schemes: a review," Annals of Actuarial Science, Cambridge University Press, vol. 19(3), pages 543-572, November.
    4. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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".
    2. Tardy, Olivia & Lenglos, Christophe & Lai, Sandra & Berteaux, Dominique & Leighton, Patrick A., 2023. "Rabies transmission in the Arctic: An agent-based model reveals the effects of broad-scale movement strategies on contact risk between Arctic foxes," Ecological Modelling, Elsevier, vol. 476(C).
    3. Jascha-Alexander Koch & Jens Lausen & Moritz Kohlhase, 2021. "Internalizing the externalities of overfunding: an agent-based model approach for analyzing the market dynamics on crowdfunding platforms," Journal of Business Economics, Springer, vol. 91(9), pages 1387-1430, November.
    4. Crevier, Lucas Phillip & Salkeld, Joseph H & Marley, Jessa & Parrott, Lael, 2021. "Making the best possible choice: Using agent-based modelling to inform wildlife management in small communities," Ecological Modelling, Elsevier, vol. 446(C).
    5. Wang, Richard & Ye, Zhongnan & Lu, Miaojia & Hsu, Shu-Chien, 2022. "Understanding post-pandemic work-from-home behaviours and community level energy reduction via agent-based modelling," Applied Energy, Elsevier, vol. 322(C).
    6. Dur, Gaël & Won, Eun-Ji & Han, Jeonghoon & Lee, Jae-Seong & Souissi, Sami, 2021. "An individual-based model for evaluating post-exposure effects of UV-B radiation on zooplankton reproduction," Ecological Modelling, Elsevier, vol. 441(C).
    7. Choi, Sunkyung & Maharjan, Rajali & Hong, Tran Thi Nhat & Hanaoka, Shinya, 2024. "Impact of information provision on tsunami evacuation behavior of residents and international tourists in Japan," Transport Policy, Elsevier, vol. 155(C), pages 264-273.
    8. Medeiros-Sousa, Antônio Ralph & Lange, Martin & Mucci, Luis Filipe & Marrelli, Mauro Toledo & Grimm, Volker, 2024. "Modelling the transmission and spread of yellow fever in forest landscapes with different spatial configurations," Ecological Modelling, Elsevier, vol. 489(C).
    9. Watson, Joseph W & Boyd, Robin & Dutta, Ritabrata & Vasdekis, Georgios & Walker, Nicola D. & Roy, Shovonlal & Everitt, Richard & Hyder, Kieran & Sibly, Richard M, 2022. "Incorporating environmental variability in a spatially-explicit individual-based model of European sea bass✰," Ecological Modelling, Elsevier, vol. 466(C).
    10. Anshuka Anshuka & Floris F. Ogtrop & David Sanderson & Simone Z. Leao, 2022. "A systematic review of agent-based model for flood risk management and assessment using the ODD protocol," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 112(3), pages 2739-2771, July.
    11. Kjær, Lene J. & Schauber, Eric M., 2022. "The effect of landscape, transmission mode and social behavior on disease transmission: Simulating the transmission of chronic wasting disease in white-tailed deer (Odocoileus virginianus) populations using a spatially explicit agent-based model," Ecological Modelling, Elsevier, vol. 472(C).
    12. Eric Innocenti & Dominique Prunetti & Marielle Delhom & Corinne Idda, 2024. "Reusable Building Blocks for Agent-Based Simulations: Towards a Method for Composing and Building ABM/LUCC," Post-Print hal-04862884, HAL.
    13. Butts, David J. & Thompson, Noelle E. & Christensen, Sonja A. & Williams, David M. & Murillo, Michael S., 2022. "Data-driven agent-based model building for animal movement through Exploratory Data Analysis," Ecological Modelling, Elsevier, vol. 470(C).
    14. Noeldeke, Beatrice & Winter, Etti & Ntawuhiganayo, Elisée Bahati, 2022. "Representing human decision-making in agent-based simulation models: Agroforestry adoption in rural Rwanda," Ecological Economics, Elsevier, vol. 200(C).
    15. Chia-Hao Ho & Marco Campenni & Constantine Manolchev & Duncan Lewis & Navonil Mustafee, 2025. "Exploring the Coping Strategies of Bullying Targets in Organisations Through Abductive Reasoning: An Agent-Based Simulation Approach," Journal of Business Ethics, Springer, vol. 199(4), pages 839-861, July.
    16. Petter, Gunnar & Kreft, Holger & Ong, Yongzhi & Zotz, Gerhard & Cabral, Juliano Sarmento, 2021. "Modelling the long-term dynamics of tropical forests: From leaf traits to whole-tree growth patterns," Ecological Modelling, Elsevier, vol. 460(C).
    17. Annie Lecompte, 2024. "The devil is in the details: a taxonomy of red flags of fraudulent initial coin offering projects," SN Business & Economics, Springer, vol. 4(11), pages 1-21, November.
    18. Risso, Lucas Antonio & Ganga, Gilberto Miller Devós & Santa-Eulalia, Luis Antonio de & Godinho Filho, Moacir & Chikhi, Tinhinane & Mosconi, Elaine & Zhang, Kaiwen, 2024. "A framework for modeling and simulating blockchain-based supply chain traceability systems," International Journal of Production Economics, Elsevier, vol. 278(C).
    19. Grimm, Volker & Berger, Uta & Calabrese, Justin M. & Cortés-Avizanda, Ainara & Ferrer, Jordi & Franz, Mathias & Groeneveld, Jürgen & Hartig, Florian & Jakoby, Oliver & Jovani, Roger & Kramer-Schadt, S, 2025. "Using the ODD protocol and NetLogo to replicate agent-based models," Ecological Modelling, Elsevier, vol. 501(C).
    20. Nicolas E. Neef & Lars E. Egner & Christian A. Klöckner, 2026. "Subsidy free-riding is positively correlated to the development of energy efficiency in the housing stock," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 28(3), pages 7701-7717, March.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C88 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Other Computer Software
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ven:wpaper:2026:10. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sassano Sonia (email available below). General contact details of provider: https://edirc.repec.org/data/dsvenit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.