When You’re Scared
At one of the dinners with Sonny Black’s crowd, Pistone met a man called John. John was waiting to be sentenced for a pyramid scheme that he and his brother had spread across the whole country. And he was happy to share his experience. Pistone sets out how John said the scheme worked.
You look for a rich sucker with money to spare. You tell him you have connections with clothing factories: they make more than their quota and sell the surplus for next to nothing. The sucker is ready to put in five thousand? Promise him five hundred profit in the first week. The profit is fat, so a queue of new investors forms at your door, ready to put in more. You pay the interest, keep most of the principal for yourself, and when you’ve collected enough, John said, you wave goodbye to the investors and disappear with their money.
And he added what I think is the most valuable part of the whole story. The scheme worked best, according to him, with doctors and other qualified professionals: they’re always looking for somewhere to put their spare money. His last victims were a few chiropractors.
They knew how to put a spine back in place. Not how to count.
Ten Per Cent a Week
Five hundred dollars on five thousand in a week is ten per cent. A week. By the rule of seventy-two, money at that rate doubles in about seven weeks and grows hundreds of times over in a year. No honest business on earth earns like that. Not an olive mill, not a laundry, not a factory, not a bank.
So why do clever people, doctors, hand over their money? Not out of stupidity. The first payment arrives. Five hundred dollars in your hand is stronger proof than any calculation. Your head says: this can’t happen. Your pocket says: but here it is. The second payment arrives, the doubts vanish completely, and the doctor brings in another ten thousand and a colleague along with it.
Fear and greed have the same weak spot: both are bad at probabilities. We overrate small chances of a big win—that’s why we buy lottery tickets. And we underrate big chances of a quiet loss—that’s why we believe that our particular fund manager won’t disappear.
Astronomical Returns
Gambetta tells how the tobacco smuggling business grew in Sicily in the early 1970s. A whole ship’s cargo cost a huge amount of money, and the mafiosi, trading on their reputation as guarantors, raised capital wherever they could: from their families, from other mafiosi, from clients, from people in their villages. All those people knew was that they were dealing with respected men. At the same time, Gambetta writes, ordinary people were also being offered astronomical returns for putting money into some unnamed informal network.
And a small-time criminal, Stefano Calzetta, was offered the chance to put ten million lire into smuggling. The condition: the motorboat’s cargo would be registered in his name.
Read that again. He was being paid a return for taking on the risk: if the boat was intercepted, the cargo would turn out to be his, and he would be the one doing the time. A high return is almost always payment for a risk nobody is showing you. Sometimes the risk is that everything gets stolen. Sometimes it’s that you go to prison.
My Luck Has to Turn
There’s a third fear too—the fear of missing out after a long losing streak.
On the evening of 18 August 1913, in the casino at Monte Carlo, the roulette ball landed on black twenty-six times in a row. As the streak grew, the players bet more and more against black: red was bound to come up. The wheel, of course, didn’t owe anybody anything. A spin doesn’t remember the one before. Ever. The players lost millions of francs.
Lefty Ruggiero, Pistone’s mentor, lived his whole life inside that mistake. Pistone is blunt about it: Lefty gambled badly, he never had any luck, and he didn’t know how to stop. Like any compulsive gambler, he always felt the big win was just around the corner. Once in Florida he and Pistone took a bet on six races in a row: you had to pick the winner in every one. They won the first five, betting on outsiders, and there was the sixth to go—and about thirty thousand. That’s when Lefty got scared and bet on the favourite, to be on the safe side, as he put it. The favourite lost.
There’s fear in its purest form. Five times Lefty took a risk when he had nothing to lose, and the sixth time, when there was something to lose, he turned cautious. Exactly when caution made no sense. Experienced gamblers call it “playing scared”, and it’s a sure way to lose, however much you know about horses.
In The Sopranos—a television series, so fiction—there’s a man who owns a sporting goods store. He sits down to play poker with Tony Soprano and his men, loses, sits down again to win it back, and in the end hands them the store to cover the debt. The writers didn’t make anything up. They just showed what a man does when he’s chasing a loss.
Where Not to Put Your Money
From all this I worked out a few rules for myself, and I think Don Vincenzo would have approved of them.
Don’t put money into anything that promises more than any business you know could honestly give. They promise many times what the bank pays? Ask what risk they’re not showing you.
Don’t put money into anything you can’t explain to your neighbour in two minutes. You don’t understand where the money will come from yourself? Most likely from the next investor.
Don’t trust the first payment. A pyramid always pays the first ones. That’s its advertising.
Don’t chase your losses. Lost money doesn’t come back because you take an even bigger risk.
The Don, by the way, once refused to put money into a “sure thing” offered by an old friend from the neighbourhood: the man was promising thirty per cent in three months. The friend took offence. Six months later he came to borrow money, because he’d lost everything, and the Don gave it to him—not as a loan, just like that. “It’s cheaper than investing would have been. And at least I know where it went.”