PYRAMID SCHEME
A pyramid scheme is a fraudulent system of making money which requires an endless stream of recruits for success. Recruits (a) give money to recruiters and (b) enlist fresh recruits to give them money.
A pyramid scheme is called a pyramid scheme because of the shape of a pyramid: a three dimensional triangle. If a pyramid were started by a human being at the top with just 10 people beneath him, and 100 beneath them, and 1000 beneath them, etc., the pyramid would involve everyone on earth in just ten layers of people with one con man on top. The human pyramid would be about 60 feet high and the bottom layer would have more than 4.5 billion people!
Thus, in very short order, 10 recruiting 10 and so on would reach 10 billion, well in excess of the earth's population. If the entire population of earth were 5 billion and we all got involved in a pyramid scheme, the bottom layer would consist of about 90 percent of the planet, i.e., about 4.5 billion people. Thus, for 500 million people to be WINNERS, 4.5 billion must be LOSERS.
In a straightforward pyramid scheme, a recruit is asked to give a sum of money, say $100, to a recruiter. The new recruit then enlists, say, 10 more recruits, to give up $100 each. In the simplest example, the recruiter keeps all the money he gets from his recruits. In our example, each recruit gives up $100 in exchange for $900 ($100 from each of his 10 recruits minus the $100 he gave his own recruiter). In order for no one to lose money, the recruiting must go on forever. On a planet with a limited number of people, even if the planet is as large as Earth one runs out of new recruits rather quickly.
Thus, the result of all these schemes is inevitable: at best, a few people walk away with a lot of money, while most recruits lose whatever money they put into the scheme. In fact, the only way anybody can make money through a pyramid scheme or chain letter is if other people are defrauded into giving money upon a promise of getting something in return when it will be impossible for them to get anything at all in return. That is to say, in plain English, these schemes always constitute fraud. They use deception to get money. That is why they are illegal. They are not illegal because they involve recruiting people to recruit other people to recruit other people. That is perfectly legal and is done to some degree in many legitimate businesses. They are not illegal because they involve giving money to people. It is perfectly legal to give money to people. They are illegal because they involve deceiving people in order to get money from them: that is the legal meaning of fraud.
In actual fact, however, no pyramid scheme will ever work this way because the scheme will never get the number of recruits we've been speculating about. All pyramid schemes will begin to die when the later recruits don't sign on in numbers large enough to pay off the earlier recruits. There will always be enough people who will smell the scheme out. There will always be too many people who will say "if it sounds too good to be true that's probably because it is." There may even be a good number of people who will realize that though one person recruiting ten doesn't sound like much, it quickly adds up to unrealistic and improbable numbers. Also, all it takes is one person to stop the whole thing, either by adamantly persuading recruiters of their indecency.
A pyramid scheme is called a pyramid scheme because of the shape of a pyramid: a three dimensional triangle. If a pyramid were started by a human being at the top with just 10 people beneath him, and 100 beneath them, and 1000 beneath them, etc., the pyramid would involve everyone on earth in just ten layers of people with one con man on top. The human pyramid would be about 60 feet high and the bottom layer would have more than 4.5 billion people!
Thus, in very short order, 10 recruiting 10 and so on would reach 10 billion, well in excess of the earth's population. If the entire population of earth were 5 billion and we all got involved in a pyramid scheme, the bottom layer would consist of about 90 percent of the planet, i.e., about 4.5 billion people. Thus, for 500 million people to be WINNERS, 4.5 billion must be LOSERS.
In a straightforward pyramid scheme, a recruit is asked to give a sum of money, say $100, to a recruiter. The new recruit then enlists, say, 10 more recruits, to give up $100 each. In the simplest example, the recruiter keeps all the money he gets from his recruits. In our example, each recruit gives up $100 in exchange for $900 ($100 from each of his 10 recruits minus the $100 he gave his own recruiter). In order for no one to lose money, the recruiting must go on forever. On a planet with a limited number of people, even if the planet is as large as Earth one runs out of new recruits rather quickly.
Thus, the result of all these schemes is inevitable: at best, a few people walk away with a lot of money, while most recruits lose whatever money they put into the scheme. In fact, the only way anybody can make money through a pyramid scheme or chain letter is if other people are defrauded into giving money upon a promise of getting something in return when it will be impossible for them to get anything at all in return. That is to say, in plain English, these schemes always constitute fraud. They use deception to get money. That is why they are illegal. They are not illegal because they involve recruiting people to recruit other people to recruit other people. That is perfectly legal and is done to some degree in many legitimate businesses. They are not illegal because they involve giving money to people. It is perfectly legal to give money to people. They are illegal because they involve deceiving people in order to get money from them: that is the legal meaning of fraud.
In actual fact, however, no pyramid scheme will ever work this way because the scheme will never get the number of recruits we've been speculating about. All pyramid schemes will begin to die when the later recruits don't sign on in numbers large enough to pay off the earlier recruits. There will always be enough people who will smell the scheme out. There will always be too many people who will say "if it sounds too good to be true that's probably because it is." There may even be a good number of people who will realize that though one person recruiting ten doesn't sound like much, it quickly adds up to unrealistic and improbable numbers. Also, all it takes is one person to stop the whole thing, either by adamantly persuading recruiters of their indecency.
GREED AND WISHFUL THINKING
Pyramid schemes are popular because people are greedy and greed can do wonders to a person's thinking. For a person desiring to make a lot of money from a small investment in a short amount of time, wishful thinking often takes over where critical thinking should step in. Wishes become facts. Skeptics become idiots for not getting on board. Desires become reality. Asking questions seems rude and unfriendly. Scam artists know how greed works and all it takes is one con man to get the thing started.
With the odds so stacked against a person, why would one gamble on a pyramid scheme? Greed is only part of the answer. Most pyramid people don't envision themselves anywhere near the bottom layer of the pyramid. Even the most greedy person on the planet would probably see that if one is near the bottom layer of recruits it will be very hard to get new recruits. They have to see themselves near the top in order to envision the immense wealth from minimal effort that is going to come their way.
Furthermore, if I hope to get people involved in a pyramid scheme, the first thing I must do is convince them they are not getting involved in a pyramid scheme. They may know they are illegal. Or they may realize that pyramid schemes are a losing proposition for at least 90 percent of those who get involved. So, I tell them they are joining a club. I give the club a nice name such as The Friendly Investors Club (FIC). I reassure them that the FIC is approved by the IRS and run by a CPA with a Ph.D. who is not an ASS. If I'm really good, my recruits will believe me and the police officers, secretaries, teachers, ministers, etc. whom I recruit. These well-respected, intelligent, honest people will pass on this line to others. If I am really, really good, I will have convinced my recruits not only that they are getting into a legitimate and lucrative Club, but that any earnings are tax-free. I would indicate to recruits that as long as their take in the scheme is less than $10,000, it wouldn't be taxable because gifts aren't taxable until they exceed $10,000. I would convince the recruits that, for legal purposes, they would be giving money away and others would be giving money to them.
With the odds so stacked against a person, why would one gamble on a pyramid scheme? Greed is only part of the answer. Most pyramid people don't envision themselves anywhere near the bottom layer of the pyramid. Even the most greedy person on the planet would probably see that if one is near the bottom layer of recruits it will be very hard to get new recruits. They have to see themselves near the top in order to envision the immense wealth from minimal effort that is going to come their way.
Furthermore, if I hope to get people involved in a pyramid scheme, the first thing I must do is convince them they are not getting involved in a pyramid scheme. They may know they are illegal. Or they may realize that pyramid schemes are a losing proposition for at least 90 percent of those who get involved. So, I tell them they are joining a club. I give the club a nice name such as The Friendly Investors Club (FIC). I reassure them that the FIC is approved by the IRS and run by a CPA with a Ph.D. who is not an ASS. If I'm really good, my recruits will believe me and the police officers, secretaries, teachers, ministers, etc. whom I recruit. These well-respected, intelligent, honest people will pass on this line to others. If I am really, really good, I will have convinced my recruits not only that they are getting into a legitimate and lucrative Club, but that any earnings are tax-free. I would indicate to recruits that as long as their take in the scheme is less than $10,000, it wouldn't be taxable because gifts aren't taxable until they exceed $10,000. I would convince the recruits that, for legal purposes, they would be giving money away and others would be giving money to them.
........ADAPTED FROM SKEPTIC DICTIONARY
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