From SNAFU with Ed Helms: Adam Grant and The OG Ponzi Scheme

0:00That's exactly the kind of weaponization of charisma that makes me extremely uncomfortable. In fact, I need to go take a shower right now. Can you hold? No, we can't wait for you to take a shower. We're going to have to go with you into the shower, I'm afraid. It's just the rules. That's also very creepy.

0:27This is an iHeart Podcast.

0:33All right. Welcome to Snafu, your favorite podcast about history's greatest screw ups and a little bit of reflection about what those screw ups say about us as human beings. Spoiler alert, most of it's not good. Most of the podcast is very good. What it says about us, not so good. I'm Ed Helms, your host. And today I am joined by someone I've gotten to know over the past several years, mostly through a delightful pattern of us helping each other out with our book events. And last spring, he even hosted me at Wharton in Philly to talk about my snafu book, which I think makes me a visiting scholar at Wharton.

1:14Don't fact check that. He's also a best-selling author, a tenured professor at the Wharton School of Business, an organizational psychologist, and truly one of the most thoughtful, perceptive voices on human behavior and culture. His latest book, Hidden Potential, The Science of Achieving Greater Things, debuted as a New York Times bestseller, which, by the way, is his sixth book to do so, I believe. He is the wise, witty, and dangerously insightful Adam Grant. Adam, thanks so much for being here. Wow, that's quite an introduction. I feel like if I fail, I'll be living up to the podcast, but not my bio.

1:53I gotta ask, the work you do falls under this rubric, organizational psychology, which to me, like I do, I feel like I have a sense of what you do, but that term is still kind of cryptic to me. How do you define it exactly? Like what is your area of expertise exactly. Yeah, I'm here to figure out why your closet is a mess and then clean it up. No, I think the easiest way to describe what I do is I study how to make work not suck. And do you have a pithy answer? Is it just pay people more? I try to reform the Michael Scott's of the world. That's one I can I get. I can latch on to that. In your capacity as a business school professor, It's about sort of just deconstructing why and how people behave in good or bad ways, I guess.

2:44Is that fair? Well put. That's what I should have said. Okay, good. Thanks for writing my lines for me, Ed. Well, I also just copyrighted that. So I can't use it. You can, but you just have to pay me. That's all. Damn. I should start by saying, I think you're the perfect guest for today's story because we're going to talk about scams. And it strikes me that your training and research and expertise in human behavior and psychology, would that make you bulletproof from scams? No, it just makes me better at analyzing why I fell for them. OK, it makes you more arrogant as you walk right into them.

3:21Surely I'm immune to this. This will never affect me. And then, oh, I have the language and the evidence to explain exactly the error I just made. Yes. Wait, so have you ever, have you fallen for any scams? You've been taken in in some way? I don't think I've fallen for, you know, a major scam, like those Nigerian Prince emails or a Ponzi scheme. But I've definitely been duped by people who take advantage of my tendency to trust other people. So I overpaid for my first car, did not realize it was possible to negotiate my first job offer. I don't know if those are scams, but I definitely got the short end of the stick in those situations.

4:02I feel like some of that stuff kind of rides into scammy territory. Like, I agree with you. I feel pretty vigilant about this kind of thing in general. But I had a plumber upsell me on this huge water filter system. And, like, I had hired him to do this thing. And then he was like, by the way, you don't have a water filter in your house. And if you thought about it in your neighborhood, you should have it. And I was like, yeah, yeah. OK, great. And then I wound up having to hire another plumber like six months later for a different little job. And he immediately launches into his water filter speech.

4:37And I was like, oh, God. And I felt like kind of a sucker. I don't know. And also, I'm ADHD. And I feel like there's so much out there that sort of tries to prey upon the ADHD mind in a way that's like supposed to help an ADHD person. So interesting. I'd never connected this to neurodivergence before, but yeah, I can see the shiny object sort of put in front of you. Ooh, I want one of those. Yeah, well, it's targeting your shame. It's like the thing that has brought you this like sense of discomfort or shame or sort of fear in the world. And they're saying, like, here's a like this app will fix it for you or this whatever.

5:27Well, I feel like this is the appropriate time to tell you about the productivity app that I've been building. I would trust you. Today's story is about a man whose legacy is so shady that practically every major grift of the last century bears his actual name. And, yes, we are talking about the patron saint of financial flim flam. Ladies and gentlemen, the one and only Charles Ponzi. So buckle up.

6:01We're going to dive into sort of the origin of the term Ponzi scheme. And it is it all starts with this guy, Charles Ponzi, born in 1882 in Lugo, Italy, as Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi. And that's that's a lot of name right there. They're not messing around with that. His family had once been comfortable, but by the time he was in college at the University of Rome, they were not so well off. Instead of studying, the young Ponzi spent most of his time schmoozing with his rich friends in cafes and drawing down what little cash he had. Upon graduation, broken, restless, he did what generations of dreamers have done.

6:45He bet on America. And so off he went, landing in Boston in 1903. After a few years bouncing between odd jobs, he drifted north to Canada. And that, as it turned out, is where his real financial education would begin. Now, Adam, people who knew Ponzi described him as unbelievably charismatic, like he's the kind of guy who could charm the paint off a wall. And I feel like we've all known these people and they can really cast a spell on us. So I'm just curious, like from your vantage point, how do you see that level of charisma? Like what is it an innate wiring or is it is it conditioning or is it something we can sort of learn?

7:27I would imagine in a business school, charisma is an extremely hot commodity. It can be. So it is a being a mix like everything else in human psychology of nurture and nature. Some people are born more naturally charismatic than others. they exude energy and enthusiasm, and they're very quick on their feet and flattering, and they often have superficial charm. But it does turn out to be a teachable skill. Wherever you start, you can improve from that baseline. There are actually some experiments by John Antonakis and colleagues where they take students and they teach them kind of the memes of charisma.

8:04They teach them to use the right vocal inflection and to make eye contact at critical moments and, you know, to master the nonverbal cues in terms of their gestures. And then they show that even six weeks later, when those students are giving a speech, they're judged as more charismatic. And I think I'm more and more reluctant to teach that skill because as I think your description of Ponzi is foreshadowing, it can be used for evil as well as good. And even if the intentions of the person wielding it are good. It tends to shut down the critical thinking of the audience. There's a paper on the awestruck effect that I loved showing that if you're talking to somebody who's charismatic, you actually scrutinize their message less carefully.

8:51And so I like to think of that as the dumbstruck effect. And I think we should all be cautious about that. Wow. That is fascinating. I mean, look, we were talking earlier about, have I ever been scammed? The closest I've been to scammed is kind of falling for the spell of somebody who's very charismatic. And I think the best defense against that spell is not to interact with somebody directly. It's to read their writing because then you strip away a lot of the irrelevant information that they might use to seduce you. And frankly, AI tools, have made that much more difficult now. But I almost only want to teach charisma to people who have already demonstrated generosity, humility, integrity, the basic foundations of character.

9:41Wow. That's really cool. I have to say, if we could teach those people to be the most charismatic, then we might have hope for humanity. There was that famous Neil Strauss, right? The game. The game. Which was essentially a version of this, right? A kind of teaching of teaching people to like pick up women was a very sort of skeezy version of charisma, I guess. A twisted version of it where you wear odd clothes, like goggles on your head to signal, I'm above worrying about what other people think of me. I set my own trends. I'm a nonconformist. And then you go and insult women because it suggests that you're out of their league.

10:30And then all of a sudden, they, in some cases, seem to take an interest in you. And that's exactly the kind of weaponization of charisma that makes me extremely uncomfortable. In fact, I need to go take a shower right now. Can you hold? No, we can't wait for you to take a shower. We're going to have to go with you into the shower, I'm afraid. It's just the rules. That's also very creepy. So in 1907, Ponzi landed in Montreal and scored a job as an assistant teller at a small bank serving Italian immigrants. And it was there that he witnessed the original model of the scam he would later perfect.

11:06His boss, Luigi Zorossi, lured depositors with absurdly generous interest rates. And amazingly, he would pay them, of course, by funneling new deposits straight to the earlier investors. It was a beautifully unsustainable system. So when the bank inevitably crashed and Zorosi bolted for Mexico to avoid accountability, Ponzi was left behind unemployed, but newly educated in the fine art of financial tomfoolery. Now, most of us would look at this whole mess and think, OK, well, that backfired. Maybe crime doesn't pay. hey, what can you tell us about the psychology of someone who definitely does not learn that lesson?

11:52In fact, sort of learns the opposite lesson of like, here's more opportunity. I mean, do you see like sociopathy at play or is it just sort of that healthy or maybe unhealthy ego with a kind of rules don't apply, swagger? I mean, how dark is that? So there are three traits that would normally predict being attracted to that kind of scheme. And psychologists call them the dark triad. And you hit on one of them pretty closely anyway. They're being a narcissist, being Machiavellian, and being a psychopath. And I think we're probably talking about Machiavellianism here more than we are being a narcissist or a psychopath or sociopath.

12:38because what this kind of scheme is really about is it's about manipulating other people and using them for personal gain. And you don't have to have a giant inflated ego to want to do that. You don't have to feel no empathy for other people. You just have to be a little bit callous around feeling like, you know what, I can use other people a little bit. And in fact, I think part of the appeal of a Ponzi scheme is you look at that and you say, well, you know, if I can keep it going, actually I'm going to profit and no one else is going to get hurt because each, like each, each former investor is going to get their money back because of a new one.

13:17And so all I have to do is perpetuate it. And you know, I'm just, um, I'm exploiting a loophole in the system. I'm not exploiting people so much. And I think if you tell yourself that story, you probably sleep at night and it doesn't, it doesn't require much more than a little bit of Machiavellianism. Now we're still in Montreal. Ponzi happened to wander into one of the former client's office from the failed bank he had been working at. And he found it completely unattended, peak early 1900s security at work. He poked around, spotted an unguarded checkbook and thought, well, no mind of a do. And he wrote himself a check for$423.58, which I love the specificity because that seems so official.

14:04It's like that's like such a an amount. Right. It seems like something that would that would be like, oh, that's a no one would just make up that number. But that's a lot of money. It's worth about 15 grand in today's money. So he forged the manager's signature and he strolled out just like he'd been picking up dry cleaning. He was caught almost instantly because he spent the stolen money so loudly that Montreal police were basically like, how is this broke guy suddenly like flashing wads of money and eating in fancy restaurants? So Ponzi was arrested and he spent the next three years in a bleak penitentiary outside of Montreal, which not a great return on investment so far.

14:46Here's a mugshot from 1910. Let's take a look. I mean, how do you not love this guy? Look at the twinkle in his eye and the mustache. This is a mugshot, and he looks like someone I want to just have a beer with. I will not be joining you for that beer, Ed. There's something about his smirk under that mustache that's like, it's got a little charm to it. Yeah, he sort of reminds me of Mr. Bean. Mr. Bean. He could be Rowan Atkinson in love, actually. There you go. That's what I'm seeing. That's not as flattering a depiction. Now, this part kills me. Rather than tell his mother that he was in prison, Ponzi rode home to Italy, proudly announcing he'd landed a job as a special assistant to the warden, thus explaining the letters coming from a prison.

15:39I think we all lie to our parents, right? Just to kind of make ourselves feel better or look good in a situation. Any memorable occasions? For me? Memorable occasions? Yeah. Adam Grant lying to mom or dad. Oh, I told a white lie to my mom after Halloween one year that I didn't sneak candy with a friend from the candy drawer. That's as bad as it gets? It's the worst one. I felt so much shame after that. Never again. Yeah. It's funny, these formative things. Like, at that moment, you were young enough that the stakes felt catastrophic. I think I was 10. And the friend started it and then the drawer was open and I felt like, okay, go for it.

16:24I remember my friend took, like stole a pack of his mom's cigarettes. And we were, I think I was about 10. And he was like, let's smoke a cigarette. And I was like, are you insane? This is great. We can't smoke, say we're children. And cigarettes and candy, the things that get us in trouble as children. OK, Charles gets out of prison and he heads back down to Boston. And this is where he would hatch the truly epic scam that would make him a legend. And it all began with a quirky little nugget of postal bureaucracy known as the International Reply Coupon. This was basically a prepaid postage voucher.

17:10So you'd buy one at your local post office, stick it in your letter to someone overseas, and then they could exchange it in their country for the stamps needed to write you back. So it was kind of like putting a prepaid envelope in your letter to someone so that they could write you back more easily. Here's where things got interesting. The system was created in 1906 with fixed exchange rates. But after World War I, those rates went completely out of whack across Europe. So cut to 1919, Ponzi received a reply coupon from Spain, which had been purchased for about one cent in Spain. But it was redeemable for six cents worth of U.S.

17:51stamps. And that tiny arbitrage flicked a switch in Ponzi's brain. So he launches a company to buy reply coupons in bulk overseas, send them back here to America, and then redeem them for a tidy profit. Not a bad idea. But then comes the big leap. Ponzi scales up like bigly. He invites investors, promising an eye-popping 50 % return in 45 days. Bostonians are flocking to him. And soon he started a company called the Securities Exchange Company, which has a very sophisticated and legit ring to it. And he had offices stretching from Maine to New York. Now, it's worth pointing out that this business model was definitely cheeky, but it was not illegal.

18:43Investors were getting paid, as promised. In fact, and this is very wild, a few government officials who went poking around to verify the legitimacy of Ponzi's operations actually ended up investing with him. For a while there, everything was coming up Ponzi. You know, he's got all this newfound wealth and a tasteful new mansion with enough room for his wife, Rose, and his mother, who he brought over from Italy. I mean, come on. This guy is a – what a gentleman. He's taking care of his own mother. But Ponzi's projected squeaky clean charitable image was not going to last. What's happening behind the scenes is actually getting pretty shady.

19:26And even the pros who are coming to investigate him are missing the signs. So I'm just curious, like, from your Wharton perspective, like, what are the red flags that you can actually, you know, like you talked about the what was it, the triangle of. The dark triad. The dark triad, excuse me. But those are things that might exist in someone that we can't immediately perceive. So what are red flags that might jump out at us when somebody might be perpetrating a scam? Apart from the obvious, like, you know, mustache twirling, et cetera. Yeah. The best data on this actually are hedge fund managers being interviewed, where you see that the most self-centered ones, the ones who are most likely to take advantage of other people are the ones who just spontaneously start grinning when talking about other people failing.

20:22And if you feel that kind of schadenfreude and you enjoy seeing other people flop, in your language, Ed, if seeing somebody else's snafu makes your day, That is, I mean, that to me is a huge red flag. Wow. Yeah, that feels like pretty much everyone we see on the news these days. There's just like gloating is a real problem right now. Gloating, which is essentially sort of like the, what, it's like the bragging response, the bragging articulation of schadenfreude. Yeah. And then there's a cousin of that in some ways, moral grandstanding, you know, kind of like sort of self-promoting as just morally superior to other people, which tends to go hand in hand with narcissism.

21:18And I think we also see a lot of that today in scammers. If you believe that you operate on a higher moral plane than other people, then it's very easy to justify and rationalize what you're doing.

21:34Eventually, Ponzi's activity caught the canny eye of New York City postmaster Thomas G. Patton. Now, being a master of the post, Patton knew a thing or two about international reply coupons. Like, for instance, there simply weren't enough in circulation to explain the magnitude of Ponzi's outrageous earnings. So it just like his business model was completely incompatible with the amount of money he was making objectively just by the math. Patton wasn't the only one to notice funny math here. It seems one of the business secrets Ponzi kept closely guarded was that he was not buying many reply coupons at all.

22:19Rather, to maintain the illusion of abundant prosperity, Ponzi was using deposits from new investors to pay out the returns to old investors. And there you have it. The classic Ponzi scheme. Adam, what blows my mind is that the Ponzi scheme isn't just risky. It is literally impossible to sustain. Like it's a financial Jenga tower and it's definitely going to fall over. Why do smart people convince themselves that somehow it won't? I think that there are a couple of ways to explain this. One is, you know, it's just sort of tunnel vision, right? You're only focusing on getting the next investor on board and you're not looking far enough into the future or maybe wide enough to see that somebody is about to come and knock over your Jenga tower.

23:09Or if even one block gets pulled out, you're screwed. I think that's maybe one factor at play. I think another one that stands out though that we don't talk about enough is what psychologists call the availability bias, which is the tendency to weigh events in terms of how easy they are to think of instead of how likely they are. And if you've never seen somebody go down for a Ponzi scheme, you can persuade yourself, I'm not going to get caught. You know, this is not even something people go to jail for. Right. But it's especially surprising in Ponzi's case because he's already done time. Yeah, he's paid for it.

23:51Well, he paid for a false check, But his previous boss was, you know, caught for it. Yeah. And I wonder if then he saw his boss make some really obvious mistakes and thought, well, if I avoid those, I'm clear. You know, to your point about sort of the dark side of charisma sometimes, I think there are people who believe they can charm their way out of anything. Right? Or charm or sort of bulldoze. like they can rely on their personalities to just plow through anything. I don't know. There's something unhinged about that and the ability to kind of keep going and doubling down further and further.

24:36I mean, he was opening branch offices up and down the East Coast, like just scaling up in this massive way. And then eventually just not even buying the coupons anymore, just fully Ponzi scheming. If I were trying to run a Ponzi scheme, the guilt would be weighing on me so much. I'd just be this sweaty, blubbering mess the whole time. But then you have someone like Ponzi who just like smiles and shakes your hand and can just look you in the eye and crank through all of it. It's so bewildering to me. Well, I just think you just hit on something really critical here, which is we often describe someone like Ponzi as shameless.

25:15But I think they're better characterized as guiltless. being guiltless is, I don't even know if I've ever heard the term guiltless, but when you, when you said I would feel guilty, I think about the psychology of guilt versus shame. And the basic distinction is when people feel guilt, they think I did a bad thing. When they feel shame, they think I'm a bad person. And shame actually tends to have pretty negative effects in most cultures. Um, you know, when, when you start to feel ashamed, you either attack or you withdraw altogether. You feel small and you either want to obliterate whoever's making you feel small or you want to withdraw from the situation.

25:57Guilt is much more functional. When you feel guilty, you think, okay, I've got to right my wrongs. I have to repair whatever harm was done. I have to try to recover my reputation. And Ponzi sounds like somebody who just was maybe immune to guilt or at least didn't have a normal human response to it. Because from the pattern of behavior you're describing, it doesn't sound like he really felt any remorse around the people that he was screwing over. But isn't that the definition of a sociopath or a psychopath? It's certainly one of the foundations of it. I think it's possible to be guilt-free without being a sociopath.

26:48Basically, I think most sociopaths would be guiltless, but not all guiltless people are sociopaths would be maybe the way to capture it. Maybe he has convinced himself that he's taking care of each investor as he brings on the next investor. And so whatever guilt he feels ends up quickly evaporating. And also there you get so much reinforcement as you're sort of as your wealth increases. So does your position in society and your, you know, your physical presentation, your clothes, your style, your cars, all these things, these sort of signals of success. just being a successful human, you know, you're well-groomed, all these things, these sort of like ancillary just details of your life start to have this like resonant vibration of like, you're fantastic.

27:39You're just a great person. And you can kind of convince yourself of that. Yeah, that's validating. And you also have all these clients who love you, Right. Your investors, they're so pleased with you. They're actually they're fueling your narrative. They're making the rationalization easier. Wow. Look at all these people I've helped. Yeah, that tracks. All right. So the suspicions that Ponzi's business were fraudulent were eventually confirmed with a damning expose that ran in the Boston Post on August 2nd, 1920, penned by Ponzi's own publicity man, William H. McMasters. In the multi-page spread, McMasters condemned Ponzi as hopelessly insolvent and fessed up to his own contribution to Ponzi's confidence campaign.