h2g2 The Hitchhiker's Guide to the Galaxy: Earth Edition

There is a pyramid scheme going on in my city at the moment - apparently hundreds, and possibly thousands, of people have been duped into joining it. Of course some of them will make money, but many of the late entrants will lose every penny they invest.

People join the scheme with the understanding that if you pay money now to the person at the top of the pyramid, and you then convince a number of friends and colleagues to join the pyramid, with them paying whoever is now at the top and recruiting even more friends, you will eventually reach the top yourself and be rewarded with multiples of your original payment from those lower down. So if a pyramid involved 3 cycles of payments and required just 3 people to be recruited each time, and if the initial payment was 1000 pounds, the person at the top of the cycle would gain 26,000 pounds when all 3 cycles were completed. Easy money, eh?

The problem is that these schemes burn out of potential recruits at an incredibly rapid rate. After 10 such cycles as described above, you would need 59,000 new recruits. After only 21 such cycles, you would require more people than the current population of planet Earth - 10.4 *billion* people. In a word - its unsustainable.

So they collapse, and with it go the "investments" of the vast majority of players. A small number of people make money from the pyramid scheme, but most of them can count on losing a lot of good friends in the process.

Pyramid schemes are a good example of the general lack of understanding of the key difference between arithmetic processes and geometric processes. Or maybe it's just an example of how trusting we are of other people, even when what they are doing makes no objective sense.

I thought they were banned nowadays?

Not in Ireland, apparently. What's more, the newspapers and radio stations have made it a huge issue, and are calling people fools for even considering joining. But people are ignoring them and carrying on bloodymindedly, heedless to the situation they are getting themselves into. It's amazing how people can behave isn't it?

I suppose some people will do anything if they think they can make a quick buck.

This thing has been going on for some time now, so I would expect that the sums of money involved are truly enormous. There will be a lot of problems when it collapses.

I bet you will then find out someone you know is in it

Right. Although I would not expect many of my immediate friends to be so unwise. It'll remain fairly hush-hush until the sky falls in, and then we will start to hear about it all over the place.

The prospect of making some easy money will always attract those who feel the world owes them a living.

How can anyone believe that they will work? I would be most offended if a friend asked me to join in.

However, there are other schemes which make you believe that you are actually going to be running a legitimate business whilst still recruiting new members to extend your tree and earn you a percentage of their "sales".

It's called Multi Level Marketing (MLM) and involves products from cleaning stuff to water filters or costume jewellery.

Again, the originators of these schemes are the ones who make the serious money and the poor souls who can't really afford to take part are usually the ones who lose out.

I know because I've been one of those fools and I never want to see the "friend" who got me into it again.

At the time (about 20 years ago), I was drifting through life with no real direction or career prospects, living from hand to mouth, so found the idea of eventually earning a lot of money for reducing levels of effort extremely attractive.

Luckily, I saw the pitfalls before upsetting too many people and "only" lost one potential girlfriend and a couple of hundred quid for the purchase of demo stock, literature and stationery.

There are a very few schemes which have successfully turned into party-plan, such as Amway, but most MLM is just pyramid by another name.

How do party plans work?

I use the term loosely to indicate a situation where somebody has established a group of customers and acts as the agent for the product, taking a sales commission.

Tupperware, Ann Summers etc would be classed as Party-Plan from the outset, whereas Amway, NSA and others (I believe) started life as MLM schemes.

JT

Ok - pretty much like normal sales models. Wasn't it Albania where the economy practically collapsed because of a pyramid investment scheme?

I don't know, but that would probably do it.

The trouble is that the sales pitch behind pyramid is so plausible and appeals to vulnerable people's belief in their own intelligence.

They figure that because they can follow the logic and the maths, they might seem stupid to question it.

And then, of course, there's greed and desperation.

JT

And possibly, it seems, they can see some people (who are quite ordinary and not professional sales people) make money out of it and sing its praises. The peer pressure must be huge.

Especially when the scheme is presented by somebody you consider to be successful.

I went to a training day in London for the NSA Water Filters I had got mixed up with and they were positively encouraging people to invest in projecting a lifestyle image - nice clothes, flash watch, smart car, etc - so that your prospects would aspire to be like you.

Seeing as I couldn't really afford the initial outlay, I certainly couldn't look the part.

The guy who recruited me was already a successful and fairly wealthy business man (I worked for members of his family), so he had the money to gamble and the right image.

Hey Ho!!

JT