Explaining the Ponzi Scheme to a Fifth Grader

Happy Friday the 13th for the second month in a row!

This week’s assignment for my 11 years old daughter is to monitor the news for current events and report on it at school. If you’ve been watching the news you’ll know that the Bernie Maddoff scandal has been on everyday. So inevitably, the Clone comes back to me with her list and asked, so how did this guy steal all that money?

So I tried to explain to her by using this analogy:

Say you went to your sister and told her, if she gives you a dollar to invest today, you will give it back to her on Tuesday next week and she will get $1.25. Then you go to your other sister and tell her the same thing only you will give her $1.25 Wednesday. Then you go on to your dad and every person you know and tell them the same thing. As you’re going around asking for money from other people you know, you give your first sister her $1.25 and she’s happy to have twenty five cents extra just for letting you invest her $1. So she says, why don’t you keep my dollar and invest it some more? So you say, OK.

But the thing is, you weren’t really investing it were you? You were just using other people’s money to make it look like you are earning money for them. Do you see how you will eventually run out of money especially if they all ask for their money at the same time?

So she answers, Yeah, but can’t I just ask more money from more people? Yeah, you can do that but what if you ran out of people to ask and also ran out of time? That’s what happened to Bernie Maddox and that’s why he’s going to jail.

She then said, but they said he still has millions of dollars and he’s not really in jail. True. It doesn’t seem fair, right?

Now I wish I had this video to simplify things even further. From the Jimmy Kimmel show, check out the Muppet version of the Ponzi scheme. LOL! :D

So have you had to explain stuff on the news to your kids? How did you do it?

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