People are not strictly rational. None of us really take all the facts into account when we make decisions. We just don't have time. We're often driven by hope, or desperation, and that leads to choices that we often regret later. But what seems clear in hindsight, when we have time to think things through, isn't so clear up front. Sure, diversity makes sense, but if you're getting 10% return in one area, and 3% everywhere else, and that seems to be going on, it's probably pretty tempting to move all your assets into that 10% slot. Otherwise you're steadily losing 7% on all the other money. A lot of smart people fell for this, they were probably reassured because it had history, a strong record, and most of their friends were doing it as well.

I think it's because a lot of the time, the scammers claim to have found a loophole through some detested red tape. The excitement of suddenly having the shackles off, combined with high-pressure tactics designed to force a closing decision, without being given the chance to really research the decision--or being led by the nose to the "right" information instead of the true information, are how people fall for Ponzi schemes.

The same reason people fall for any other scam. People are blinded by the chance to get more money. At least with the ponzi scheme you may have heard of some people getting their money out. How people fall for scams like you have won the Canadian lottery when you have never entered is beyond me. If people can believe they have won the lottery from another country or that they can really help some Nigerian prince with his excess gold problem it isn't a far stretch at all to believe they will come out ahead in what turns out to be a ponzi scheme. Remember that in the case of Madoff we are talking about a 30 year old scheme that really seemed real because you could call and speak with someone and got statements for 30 years.

People like to believe that if there is even the smallest chance at a scheme working it will work for them.

What confuses me the most about the Madoff ponzi scheme is how people invested all of their money with him. I'm pretty young and don't know too much about investing but if there are two pointers I know they are: buy low, sell high, and diversify! How financial experts failed to diversify boggles my mind every time I read a story about this.