Pyramid schemes...

Factual Questions
#1

I’ve wondered this for a long time and someone asked me about it tonight so I thought I would throw it out here.

Pyramid schemes should work in theory (i.e. if everyone joined in everyone would make money) but they don’t work because everyone has a bias against them, me included (which makes it hard to get people to participate).
I know there are many variations on the theme so I’m just talking about the small grass roots type that are not intentional scams. If rationaly we know they could work, why the bias?

(And, yes, I realise the last person to join might loose money, unless the population is turning over fast enough, but you still have about 300 million folks who could potentially profit - pretty good odds)

Anxiously awating the flaw in my logic…

#2

No. They don’t work because the base grows too quickly. Lack of confidence has zero to do with it.

What is the 300 million people thing? Are you saying that if everyone in the world (6B) participated, and each level expanded by 20 fold, that the last 5.7B would get screwed, and 300M would make money? That’s not success, that’s clear scam. And never mind the fact that you’d be lucky to find a million people in the world to participate. Which means you may be one of 50K to make money, but guess what, there are 950K suckers out there calling the police trying to put your ass in jail.

#3

O.K, so I was a little cavalier with my post, but…

The fact that Bill H. rightly says I would be hard pressed to “find a million people to participate” lends credence to my bias theory.
And I don’t believe these things fail because the base gets too big, not that it wouldn’t, they just don’t last that long. I’ve never heard anyone say, “Well, I would join your scheme, but I’m already in”.
They fail because people won’t participate. Now, granted, some people might be smart enough to figure out that someone on the back end might loose out, but human nature and greed being what it is I would think more people would be tempted.
I’m sure, Bill, you are a prudent, wise person, as most of these boaders are, and have no need for such things but this just seems to me to be one of those situations where human behavior goes against what I would expect and I am curious why. I mean look at the circulation of the 'National Inquirer".

#4

Start with a fixed number of people, P, and they have a total of a fixed amount of cash, C. No matter how you organise it, for some people to make money, others have to lose it. If 50,000 make a lot of cash, you could have 900,000 come out even and 50,000 lose a lot. Or, 950,000 could lose a bit, and 50,000 make a lot. But either way, the overall wealth of everyone in the system won’t increase. Unless you’re the one starting it, it’s possible to lose money; which is why the leaders are the one put in jail.

#5

You’re wrong to say that the last person to join might lose money. In fact, more than half of the participants will always lose money.

Consider the following simple example:
Level 1: 1 participant (makes money from levels 2,3 and 4)
Level 2: 2 participants (makes money from levels 3 and 4)
Level 3: 4 participants (makes money from level 4)
Level 4: 8 participants (loses everything)

In this example, seven participants make money and eight lose money. If everyone in the world participates, it will take about 33 levels before the system runs out of people and will need another 6 billion people that don’t exist just to go one more level.

#6

Actually Gunny, they “fail” because they’re mathematically impossible. (I mean, besides the fact that they are, after all, a scam through and through.)

Take the usual “Mail $1 to these five people and add your name to the bottom then mail out…” type of pyramid scheme, as commonly seen in spam mail.

Now, this is presuming each person is totally honest, and mails out their dollar and doesn’t skip spaces in the pyramid or whatever.

You get the letter, mail out your five $1 bills. You’re out $5 so far. Those five recipients mail out their $1- you’ve broken even. The next twenty-five mail out their dollars. You’ve made $25, the second five have just broken even, and 25 people are out a dollar each. The next 125 people mail out their dollars. You’ve made a total of $150, the second five have made $25, the third wave of 25 have broken even and the latest 125 have lost a dollar. The next 625 people mail out their dollar- you’ve made a total of $775, the second five are up to $150, the third group has made their first $5 and now six hundred and twenty-five people are out a dollar. The next 3,125 people mail out their dollars. You’ve made $3,900 (etcetera) and now over three thousand people are out a dollar.

Except that you are now off the “top” of the list.

Anyway, to keep going, the next stage, of course, requires fifteen thousand people to mail a dollar, the next stage takes 78,000, then 390,625, then almost two million, then almost ten million, then fifty million, then 244 million, then 1.2 billion…

So even if everyone is honest, and everyone on Earth participates, the vast majority of the population will at BEST, make $5. Most will either break even or have lost a dollar.

And for what? There’s no product, there’s no service. Pyramid schemes are scams- they were designed to scam money from the mathematically challenged.

They fail because they’re scams, mathematically impossible, the majority of those participating in them are low-grade con artists… they CANNOT “succeed” as you say, simply by honest and heartfelt participation! To “succeed”, the scam must do what it was designed to do- fleece money from the unsuspecting, in individual quantities low enough that few victims bother to press charges, and all for minimal effort.

#7

warmgun’s OP and follow-up appear to be conflating two issues.

No, as the posts above explain, some (indeed many) people invitably lose money.

This is the different question of why such schemes aren’t more prevelant. Sure, plenty of people try to start them, but they don’t seem to have many takers. Given that folks buy into all sorts of irrational behaviour, it’s not a complete answer simply to say that mathematically they’re a scam. Furthermore, there have been circumstances where pyramid schemes have taken off - Albania in the early 90s, for example. This is a social, rather than a mathematical, question.

#8

O.K., Doc Nickel, you did the math and I’ll level with you - I didn’t. And I’m a MENSA! But that’s my point. I’m not trying to justify PS’s, I’m just curious why, if people make the Inquirer one of the top read papers in the world and the info-mercial people are getting rich, they single out PS’s as bad. They seem, to the casual glance by John Q. Public, every bit as good of a deal. Or maybe it’s just me.
I was offered a chance to be in one that did not have an expotentially expanding base. At any given moment it had, say, 15 people in it. No ‘top rung’. You got in - you got out. It even worked for a friend of mine. But it too fizzled because people just wouldn’t buy in.
I really don’t think the Average Joe stops and runs the numbers. And even if they did I still feel greed should propel them into thinking,“Well I better get in quick”.

#9

So, your actual question is, “Dammit, why can’t I scam people fast enough?”

:rolleyes:

#10

The Enquirer provides a service for it’s cost. Yes, it’s trash, it’s obviously made-up nonsense, but just the same, it’s entertainment and titillation. The tabloids do the same thing MAD and Cracked magazines do, they’re just a little less obvious about it.

Look at “professional” wrestling… Everyone watching- with a few exceptions- knows it’s choreographed better than a ballet and scripted down to the eye-gouge, but it gets better Nielsens than The West Wing.

Worthless garbage, all, yes, but entertaining, and more importantly, legal.

With a pyramid scheme, there is no product, no sales, no service, no nothing. It’s purely a method to steal a lot of very small amounts of money, with a minimum of effort.

When one gets that $5, that means five people lost a dollar. They got nothing in return for that dollar, with the possible exception of becoming just a little wiser.

As for that “not a pyramid scheme” thing you mention, I’d lay a day’s wages that it was, indeed, a slightly-reworked pyramid scheme. Find the guy who offered it to you and see if you can’t get some details. I’ll bet when you boil off the doubletalk and $5-phrase gobbledegook, it’ll be a pyramid scheme. There’s lots of variants, up to and including the “Make Money Fast” type, where one pays their $5 (or $10 or $25) for a booklet on making fast, easy money, and when said booklet arrives, it’s a sheaf of photocopied instructions that tell you to photocopy the instructions and thenn turn around and sell the copies to others as instructions on how to make easy money.

In all pyramid schemes, you very rapidly run out of “customers”. If you keep it local, you’ll run out of suckers in a heartbeat.

You also have to remember that it’s totally illegal. Yes, the perpetrators are counting on the fact that the average Joe doesn’t “run the numbers” as you say. And yes, sheer greed may indeed drag some in looking to get in while there’s still money to be made, but the majority usually realize that, no matter how it’s repackaged or rewritten, it’s still a pyramid scheme and it’s still illegal.

And that’s not just “running a red light” illegal, it’s Mail Fraud Illegal. Federal Trade Commission illegal. Postal Lottery Laws illegal. Scheming To Defraud illegal. It’s illegal thruought all fifty states, all of Canada, all of Europe and the UK, all of Australia, you name it.

#11

Great Caesar’s Ghost!

Doesn’t anybody want to WORK anymore?

#12

I would say that the dot-com boom in the late 90s was basically a big pyramid scheme.

My husband got in on the ground floor of one “dot-com.”
Very quickly, the value of his stock options was HUGE.

But he realized that the company he worked for did not have a viable business plan, except to LOSE money on every transaction.

So he “cashed out” for a lot of money. A few months later, the company stock was way way down.

Basically, the whole thing was a cash transfer from people who got in late to people who got in early. Just like a pyramid scheme.

#13

The dot com book was hardly a pyramid scheme; it was a stock bubble. That occurs with depressing regularity as people begin to think that a particular industry or product is the Next Big Thing and rush to buy the stock without considering all the factors (including the possibility it’s a stock bubble). The bubble always bursts, though, as the mania subsides. If you invest with your brain, you drop the stock as soon as the slightest sign of trouble hits.

Mackay’s “Extraordinary Popular Delusions and the Madness of Crowds,” should be required reading for every investor. And the dot com bubble even had people giving serious warnings that the stock prices had no basis other than mania. Those who didn’t listen got burned badly.

#14

warmgun, could you describe this pyramid scheme that doesn’t have an exponentially expanding base?

#15

There are slight variations to the pyramid scheme.

One that is doing the rounds in the UK at the moment gets women (exclusively) to join and they are supposed to leave the system after reaching a certain level.

This is all stuff and nonsense of course as the maths doesn’t change, the number of those required to join increases geometrically.

I know these are banned in the US but not in the UK.
The logic behind the UK’s position is that no goods or services are being provided so they cannot be regulated…hmmmmm

The one I mentioned is a particularly nasty one, Women Empowering Women(WEW),each newcomer has to front £3000 and is given a ‘heart’ which is just a place marker of your position in the pyramid this makes you a ‘gifter’.
You are supposed to obtain eight hearts.

I could explain the whole thing more fully but I find it nauseating to do so.

You don’t have to be a genius to work out how quickly the numbers add up, for each ‘investor’ to reach the promised £21000 profit a further 64 others have to join.

This scheme has been targeted at women, men are not allowed in and husbands, should they be unfortunate enough to turn up at their own homes when these parties are running, are given short shrift.

The typical scenario is that one member further up the pile will attend a ‘party’ at the home of a woman further down the same pile and she will preach on about how men would be disagreeing with each other and possibly be fighting whereas the more ‘civilised’(read credulous) female gathering is mature enough to discuss and support each other.
The emphasis is on mutual support and solidarity.

There are reports of marriages being broken as losers try to secretly conceal and recoup their losses and getting in deeper still.

I am surprised at the way women have deluded themselves by hearing what they want to hear, especially when so many stupid money making ideas from their spouses are analysed and correctly debunked by the very same women.

The first area to collapse completely for lack of ‘investors’ was on the Isle of Wight just near Portsmouth. The total population there is 125000 it did not take long for this to go down.

Schemes like this make me pretty angry, other variations involve things like,

‘Do you want to make £800 per month working from home’

Where the homeworker has to front some sum of money.

The work may involve filling envolopes with leaflets advertising the scheme, the more you recruit the more you make, or menial packing work whose targets are impossible to meet.

Sadly its all too often the desparate who are taken in by these cons for that is what they invariably are.

Warmgun

I’m a little surprised at you needing to ask about such things since I have you figured for being quite smart.

#16

Simply put, the reason people don’t fall for pyramid schemes as often as they buy the enquirer is that the publishers of the enquirer don’t go to jail for fraud, and stores don’t refuse to carry the Enquirer.

Pyramid schemes, in all their forms, are illegal. The Post Office refuses to deliver anything it knows is a pyramid scheme. ISPs are not, in general, supportive of clients that use them to promulgate pyramid schemes. People who try to recruit their friends into a pyramid scheme are not generally well liked.

Also, the only pyramid schemes that can produce worthwhile profits for anyone require either massive payments or a rapidly expanding base. Either method will quickly lose interest. And no one really bothers with pyramid schemes that only promise a couple bucks.

#17

warmgun, I’m guessing you were involved with a “pyramid club” or “gifting club” such as the one casdave described. This latest form of pyramid has been springing up with increasing frequency. I know that there was a serious outbreak in Seattle not long ago. These “clubs” attempt to disguise the pyramid format, but they are no less scams than any other pyramid.

You can read all about gifting clubs at the crimes-of-persuasion website, which also has a good section on why pyramid schemes fail.

#18

I am so sorry I even started this thread.

SpoilerVirgin: I have never been involved in any type of scheme, pyramid or otherwise. I work for a living and am quite content to do so.

waterj2: Football pots are illegal too but most people don’t seem to have a problem with that.

23skidoo: I wish I could remember all the details, but it was a while ago. It went something like this, you bought into a ‘airplane’ as a passenger, starting at the back seat working your way up until you reached the pilot seat, the point at when you got you ‘pay-off’ and then your were out. I guess in the strictest sense it was an expanding base PS, but the base had a finite limit (15). This was big in Dallas in the 80’s. A lot of people made a lot of money according to the news, but there wasn’t some top honcho with an ever expanding base of suckers.

FarmerOak: This was a human nature question NOT a how-can-I-make-a-PS-work-for-me question.

Normal Guy: no, no, NO!!!

I understand (NOW) that Dopers are really, really against these things but I think your collective anger blinded you to what I was asking. There are a lot of people who are not as quick on the uptake as most boarders, and these are people I was asking about. This forum has shown many examples of fraud that seemed, to me, easier to see through than PS’s and cost a heck of a lot less.

For the record: I am not interested in being involved with PS’s in any way. I’m a good guy. I don’t lie , cheat, or steal. Again, this was human nature question. So (Nick Cage voice/‘Honeymoon in Vegas’), “Would you please stop CRUSIFING me with this?”
:slight_smile:

#19

“The Airplane Game” is like any other pyramid scheme: if you look at one tiny part, you only need a few people. For the whole game to continue, you need ALOT of people.

You start out as a “passenger”, along with 7 other passengers. The next level above you sits 4 “crew members”. Above them sits 2 “co-pilots”, and at the top sits 1 “pilot”. The passengers pay the pilot their starting fee, which for this game unfortunately is usually pretty steep. Around $1500.

The pilot is “off the top of the list” now. The plane splits into two parts, and everybody moves up a slot: passengers becoming crew members, crew members becoming co-pilots, and so on. The previous co-pilots are now “pilots” of their own airplanes: When 8 passengers join, they will “pilot-out” with, assuming a $1500 entrance fee, $12,000.

warmgun, you’re right. For YOU to get YOUR money, you only have to find 14 people to join your game. But what about all of those people, the ones who gave you their money? Shouldn’t they get to pilot-out too? If they get in “early enough”, when there is a large pool of interested participants, then they might get to “pilot-out”. But as the whole game progresses, you need more and more people. Not just 14 more, LOTS more.

At some point the game will end. There’s simply not enough people around to make the game go on indefinitely. And when the game ends, you’re going to have alot of passengers, crew members, and co-pilots out alot of money. It’s true that alot of people will make money with a pyramid scheme. It’s sad that they had to take it from people who didn’t understand that in a pyramid scheme, someone HAS to lose money.

#20

The Albanian case is a good example of what happens when unsophisticated “investors” buy into a pyramid scheme - so many people lost money that the resulting riots came close to toppling the government. It’s a real life illustration of the mathematics set out by other posters - inevitably, participants lose money, sometimes a lot of it.