A Ponzi scheme is a fraudster uses money from new investors to pay old investors, so that it looks like he is doing something profitable. At some point, when all the investors want their money, he doesn't have it (because he took some of it).

A key part of the definition of Ponzi scheme is fraud (the fraudster said he was making money when he wasn't). What's the word for a "Ponzi scheme", happening by accident. For example, a bunch of people may invest in a stock causing a bubble, and then the price crashes. This is like a Ponzi scheme because those who sold first got a profit at the expense of everyone else, but there wasn't any fraud since it happened by accident.

  • 3
    The word "bubble" works pretty well for that. That's not really like a Ponzi scheme; it's closer to a bad investment. – Peter Shor Jul 9 '16 at 12:57
  • @PeterShor Who do old investors in the stock market get the majority of their money from? – PyRulez Jul 9 '16 at 12:59
  • 1
    @PyRulez No, you are getting money from the business' clients, from its revenues, even with zero new investors. I'm not sure you know how stock markets operate. Equity is owning a piece of a business, and so if that business is financially successful, then you are financially successful. In a very, strictly, real sense you own (a part of) the business. – Dan Bron Jul 9 '16 at 14:06
  • 2
    The OP may be thinking of The South Sea Company (the South Sea Bubble); this source says "There was no realistic prospect that trade would take place and the company never realized any significant profit from its monopoly.) Or Tulipmania. And who among us has not, at least once, bought high and sold low? Bubble is good for a bubble; something like herd behavior explains many an unwise investment. The comparison to a Ponzi scheme is wrong. – ab2 Jul 9 '16 at 15:33
  • 3
    @ab2 Yes, the OP is thinking of market bubbles, and the analogy to Ponzi schemes is inapt, but the bigger problem is OP is conflating all appreciation of an asset's value with a "market bubble", rather than realizing market bubbles are precisely those appreciations which are irrational and unjustified "mob thinking". – Dan Bron Jul 9 '16 at 15:44

speculation, as defined by Merriam-Webster

activity in which someone buys and sells things (such as stocks or pieces of property) in the hope of making a large profit but with the risk of a large loss.

This is not a Ponzi scheme nor is it insider trading, both of which are illegal. I interpret the OP's phrase "by accident" as ruling out illegal activity.

This is not the place to write an essay on the role of speculation in the stock market or real estate market or in the economy (even if I were qualified to do so). However, the situation which seems to fit the OP's scenario is that of naïve investors suffering losses on their speculative investments; by the time they become aware that Company XYZ is hot, the more knowledgeable speculators will have decided to take their profits and move on, possibly because they have learned that Company XYZ is not so hot after all. For more about speculation, see below.

From Investopedia, Speculation

Speculation is the act of trading in an asset, or conducting a financial transaction, that has a significant risk of losing most or all of the initial outlay, in expectation of a substantial gain. With speculation, the risk of loss is more than offset by the possibility of a huge gain; otherwise, there would be very little motivation to speculate. While it is often confused with gambling, the key difference is that speculation is generally tantamount to taking a calculated risk and is not dependent on pure chance, whereas gambling depends on totally random outcomes or chance

It may sometimes be difficult to distinguish between speculation and investment, and whether an activity qualifies as speculative or investing depends on a number of factors, including the nature of the asset, the expected duration of the holding period, and the amount of leverage.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.