How Do Investment Ideas Spread through Social Interaction? Evidence from a Ponzi Scheme

Abstract

A unique dataset from a large Ponzi scheme allows me to study the spreading process of word-of-mouth investment information. Investors could join the scheme only by invitation from an existing member, and I can observe how the idea spreads from one person to the next based on the inviter-invitee relationships. The observed social network has so-called scale-free connectivity structure, which can significantly facilitate the spreading of the investment idea and contribute to the growth and survival of socially spreading Ponzi schemes. I also find that investors invest more if their inviter has comparatively higher age, education, and income.

Keywords: Investor behavior, peer effect, Ponzi scheme, social network, word-of-mouth

JEL Classification: D14, D83, G11