Jamesian Philosophy Refreshed

Some more thoughts lifted from my ongoing work on my next book. -----------------------  The term “pyramid scheme” is sometimes used loosely as a synonym for “Ponzi scheme,” and their meanings are related, but they are in principle distinct. A pyramid scheme is a business model in which payments are promised to one level of participants for the act in bringing in another level of participants. You, dear reader, have no doubt received the simplest form of a pyramid pitch as chain letters or their e-mailed equivalents. “Send me a dollar. Also, send out six copies of this email to friends of yours, You will get $6 as a return on your $1 investment.” Each of those six people will soon be in the same situation if you comply. It isn’t exactly a Ponzi scheme, although it shares the unsustainability thereof. What’s the difference exactly? In a pyramid scheme, the originator can make a clean get-away. Once you’ve found your own six suckers, you’ve made your profit and the ...

  I'm sure I've mentioned in earlier posts the notorious Bernie Madoff, who ran Bernard L. Madoff Investment Securities LLC from the day he started it up in 1960 until the day he surrendered to authorities in December 2008.   Madoff’s crime, in common parlance, is that he was running a “Ponzi scheme.” This is a fraud in which early depositors are told their money has been invested in some wonderfully productive/reliable way, and they are receiving a share of the profits, when in fact what they are  receiving are phony paper returns, from the deposits of other suckers. In Madoff’s case, the Ponzi scheme seems to have been adopted in a very cold-blooded way and operated for decades before it finally became unsustainable. I mention him here because I've been giving some thought to the fact that sometimes the development of a Ponzi scheme is not quite so cold-blooded. Sometimes an asset manager will bumble into running a Ponzi scheme by degrees. [I a...

We'll resume our discussion of stock options from where we were here. The above photographed felon will come into our discussion soon enough. Options can be part of broader strategies that limit exposure in either direction. You can combine puts and calls to create a “collar” around the market price of the underlying stock, limiting both your own profit and your own risk. The word “straddle” has connotations similar to “collar,” suggesting that options allow the straddler to be on both sides of the same underlying asset at the same time. Yet “straddle” has a more aggressive sound to it. As it happens, Bernie Madoff used to tell prospective clients that he was following an options-based straddle strategy.   Of course, he wasn’t following any strategy, but he needed to sell a story, and that was it.   Such a straddle strategy, by the way, can work when carried out legitimately. It can do roughly what Madoff claimed that he was using it to do – produce a slow-but-...