Lessons from a bubble burst

Abstract In 2008, two Ponzi schemes, DMG and DRFE, were shut down by the Colombian government. Using matched administrative data for a sample of almost a quarter of a million of their investors, we analyze the household risk factors associated with three main outcomes: the probability of investing, the likelihood of making a profit, and the size of financial gains or losses relative to deposits. We find that education, age, and household wealth are positively associated with these outcomes, though effects are often non-linear and vary across margins. Geographical location is also important: individuals residing in the regions of origin of the schemes were substantially more likely to invest, profit, and achieve higher returns, suggesting a role for timing and access in driving outcomes. While higher education, which has been shown to be highly correlated with measures of financial literacy, improves outcomes, even the most educated groups suffer substantial losses on average. Our findings contribute to the literature on household finance, financial education, and financial literacy, and have implications for the design and targeting of financial education programs, particularly in settings with weak regulatory oversight and limited financial literacy.