Wall Street famously operates on "fear and greed", and it's that greed factor that makes it such a popular place for con artists and Ponzi schemers to ply their nefarious trades, said Maria Konnikova, author of The Confidence Game.
"A lot of con artists prey on our desire for greed, for things to be a little bit better than they should be and for us to get a little bit more than we actually earn because we think we deserve it," said Konnikova. "And Wall Street is a beautiful preying ground for those desires."
Konnikova explains how con artists hook and clean out their marks in The Confidence Game. Her previous book was titled Mastermind: How to Think Like Sherlock Holmes. She graduated from Harvard and received her Ph.D. in psychology from Columbia University. Konnikova said she was drawn to the topic of con artistry while watching David Mamet's House of Games.
One of the reasons why supposedly savvy Wall Street investors are taken in by Ponzi schemes -- like the one operated by Bernie Madoff -- is that people have a hard time believing that an investment return can be "too good to be true if they found it themselves.
She said a basic Ponzi scheme like Madoff's starts off with a set of market-beating returns and a fraudster who does not ask for a lot of money. And because it starts small, that gives the crooked operator time to grow it under the nose of regulators.
The fraud perpetuates because investors have a new set of incentives once they put their money into the fund. They are willing to overlook so-called red flags because they want to see the fund succeed so they can get paid.
"Once you are invested in it, your incentives are totally misaligned with the truth. You don't want to see what's happening," said Konnikova. "You want to keep getting your money."
Konnikova said a smart Ponzi schemer will not always show superlative results.
"Someone who is good will mix it up a bit and have an off month, a bad year, which basically gets people off the trail," said Konnikova.