Pyramid schemes...

Factual Questions
21

Yeah, because you can easily get a football pool together without the authorities knowing or caring. In a pyramid scheme, sooner or later, you’re going to get caught at it, if you expect it to be at all successful, becuase it depends on recruiting new strangers. Also, if you try to get 10 friends involved, at least one of them is probably smart enough to yell at you for it.

Actually, I’m guessing that the real reason that people don’t bother with them is that it involves giving money to random strangers before getting any reward yourself. Most people aren’t that stupid with their own money. The only way to get lots of people to part with their money is if it has some semblance of legal recognition, or at least some way to make people pay up. Since they’re illegal, this doesn’t really happen, thus leaving them as pathetic spam-mail attempts aimed at those dumb enough to give away money to complete strangers without any hope to get anything in return.

22

Here’s a link to an FTC investigation of an alleged pyramid scheme. The interesting point is that it was being run over the internet. The FTC alleges that the scheme bilked particpants world-wide of $175,000,000. From the news release, it looks like the matter is still proceeding in U.S. federal court - the court’s made an interim order for a receiver.

23

A football pool is also more like a poker game than a pyramid scheme in that the participants all know somebody’s going to lose money. And if the organizer doesn’t take some kind of “organizing fee,” I’m not completely sure they are illegal.

24

Agreed, though I would add that a striking feature of the contemporary news reports once the “boom” was well underway was interviews with “investors” who claimed to know and understand that it was a pyramid scheme. They seemed to feel that the whole situation in the country had become so destablised as a result of the schemes, with large-scale, essentially random, redistributions of wealth taking place, that they might as well get involved. The “some people are clearly winning here and, unless I opt in, it won’t be me and I don’t want to get left behind” argument. Still stupid, in my opinion.

25

Here’s a good essay on the rise, fall and ultimate economic effects of the Albanian pyramid schemes—written by the IMF.
http://www.imf.org/external/pubs/ft/fandd/2000/03/jarvis.htm

26

I’m amazed no one mentioned Charles Ponzi, the name synonmous with pyramid schemes. The differences may seem small between a pyramid and the dotcom bubble but no one was paid directly by subsequent stock investors, only indirectly by selling their own stock. Still, people bad at math couldn’t see the inevitable result of an industry that never produced a profitable product.
http://www.smithsonianmag.si.edu/smithsonian/issues98/dec98/ponzi.html

27

Another key point is that most such scams aren’t even “pyramids” at all. In the scheme as described in the e-mail, the originator sends it to twenty people, each of them sends it to twenty more, etc. What usually ends up happening, though, is that the originator sends it to a hundred thousand people, saturates the market immediately, and nobody else but the originator makes any money at all.

28

So are you saying that the five names and addresses are all phony?

Say it ain’t so . . .

29

Actually, a Ponzi scheme is different than a pyramid scheme. The classic Ponzi scheme promises an extremely large percentage return on an investment, which is paid out through the investments of new people coming in. The scheme that Ponzi ran actually had real investments (I believe he used post office securities of some type), but the only way he could deliver on the promised rates of return was through the investments of new people. Granted, it’s similar to a pyramid, but they’re usually considered separate types of schemes (both equally illegal, of course).

30

Ponzi’s original scheme used something that wasn’t quite a postcard but was more than a stamp. Anyway, he noticed early on that it had the same “face value” whether here in the US or over in the UK or Europe. In other words, it cost- for example- five cents in the UK, and could then be redeemed for five cents in the US.

The thing was something… as I recall… to either be able to transfer small amounts of money or to prepay postage (much like modern stamps.)

Anyway, Ponzi started buying them in ever-increasing quantities and either physically bringing them back to the States or simply having them mailed here.

He would then “cash in” on the slight difference in monetary exchange (that five UK cents may have equalled six US cents, for example.)

Sounds like small change, which it was. One’s “profit” came from simply moving massive amounts of them.

Anyway, some time later, Ponzi hit upon the idea of simply having people mail them in from all around the World. To do this, he developed his scheme, which was, indeed, a scam. You bought in with the promises of massive profits, but those profits came only from later buy-ins. Like any pyramid scheme, it was mathematically destined to fail.

However, such scams not being widely known at the time, and this being the 1890’s where mail was actually something of a newfangled thing much like the 'Net today, Ponzi was able to keep the thing afloat a remarkably long time.

He would, for example, convince the early investors to simply “roll over” their money- IE, keep it in play. Okay, you’ve made a 100% profit on your $500, why not reinvest that $1,000 and make it two thousand? And so on.

Long story short, he was eventually caught, literally millions of people lost anywhere from a few cents to tens of thousands of dollars, and Ponzi went to prison.

And this was in 1890, as I recall. A hundred and ten years ago. Nothing new about scamming people out of their money.

31

IANALawyer, beatle, but unless you live in Nevada, I believe gambling is illegal. And I did not compare it to a PS in the literal sense, only that illegality dosn’t stop people from doing those things. Taking (or smoking) drugs comes to mind.

32

Doc Nickel, if you had only read the article linked to by Padeye, you would have seen that the Ponzi scam happened in 1920, not 1890. Ponzi used international postal reply coupons. This is a way of allowing a recipient (in a foreign country) a way to reply to your mail without them paying for a stamp (since, of course, your own local stamp won’t work in a foreign country).

33

Since casdave has already brought up Women Empowering Women in the UK, it may be of interest that the Guardian newspaper has a news story

on the subject today, though this is obviously tied to their accompanying feature

The Robert Fitzpatrick quote in the latter about “camoflage” seems particularly relevant to the issue of why people get involved. My take on it is that your basic “Make Money Fast” scheme doesn’t take off because too many people have (rightly) had it drummed into them that pyramid schemes are a bad idea. The legal position is important, but more as a reinforcer - a friend says to the prospective mark “that’s stupid and furthermore it’s illegal.” However, mask the operation in a little suitable flim-flam and you have a pool of people who will fall for the scheme without thinking through the maths, even though these are identical to the transparent version.

To switch to the question of Charles Ponzi, I’d always associated him with the Florida property boom of the Twenties. Indeed this is how he’s mentioned in the opening chapter of Galbraith’s The Great Crash 1929, specifically tieing him to events in 1925. Can anybody clarify?

34

The stuff I have read about Ponzi not the links in this thread but in another basically said that no investment in postal reply coupons took place. They said thats how the money was made but he never bought more than a modest number for show. The postal reply coupons were used as an explanation for what people were investing in.

35

NO!!! I WANNA MONEY, AND I WANT IT NOW!!! I WANT TO SIT ON MY ASS AND HAVE PEOPLE SEND IT TO MEEEE!!!

:stuck_out_tongue:

36

Quick question-what about Amway? Why hasn’t something like that been outlawed?

37

There are also superficially similar “investment clubs” often run by immigrants, especially Koreans. Get together, say, 100 people. Everyone contributes $100 per month. Every month a name is drawn randomly, and that person takes the money ($10,000 in this case), and presumably uses it to finance a new business. Everyone has to continue to pay every month, including the winners. After 100 months everyone has gotten their money back.

Now, admittedly this doesn’t seem to make much sense. Usually it would be better to put your money in the bank where it can appreciate. But these are usually run by people from countries where the banks aren’t trusted. So this is really an alternate form of banking, a way to accumulate capital in a lump sum. But of course it requires a very strong social group…all the people would have to fear social pressure if they failed to pay. It wouldn’t work with strangers, only in a tightly knit community.

But, this is not a pyramid scheme, since everyone gets back exactly what they put in.

Amway, Mary Kay, Undercoverwear, Partylite, and such aren’t exactly pyramid schemes either. It is true that the way to make money is to recruit other agents, not to sell things yourself. But here you have actual sales of actual products, and if you or your agents don’t make sales you don’t get any money. So they aren’t pyramid schemes, although if you require a large product purchase from your new agents they could esentially turn into one.