ROVIN' AND RAVIN' WITH MIKE
Copyright © 2000 by Michael Segers, All rights reserved


Mysteries of the Pyramid Schemes

     I have a lot of really good friends out there in cyberspace. Every day, I get several e-mails inviting me to make a fortune, retire early, and live the good life. They sound just about too good to be true, and maybe you heard it from your grandmother. I know you've heard it from me before: if it sounds too good to be true, it probably is.

      Let's look at what is involved. You send some money, say ten dollars, to certain people on a list, drop their names off, and add your name to the bottom of the list. Then, just sit back and wait for the money to roll in, as your name moves up the list.

      But, just a minute, you say. That's a chain letter, and those are illegal, but look at this news about a great business opportunity I just got an e-mail about. You buy a set of reports, so you aren't just sending money. You are buying a product. Then, you copy those reports and send them to people who will buy them from you. It doesn't matter that those each report is a page of gibberish. Or, you may have an invitation to join a “gift club.” But, they all come down to the same thing. You send a few people a few bucks each, and then a lot of people each send you a few bucks each. But, by the time you get your money, the numbers will have increased amazingly. (Mathematicians would say “exponentially.”)

     There is a legitimate business venture called “multi-level marketing,” which involves your selling a product that has some intrinsic value, say, a didgeridoo. In other words, people can buy a didgeridoo and learn to play it without participating in sales of the Australian aboriginal wind instrument to others.  In an MLM program, you will be more successful if you recruit your customers to sell the product as well, so that you can receive a percentage of the commission of those below you. But, if enough people want to learn to toot a didger, you do not have to recruit anyone below you in the pyramid in order to make a profit by selling the product itself.

     In the “pyramid” schemes which star in so many e-mails, however, there is no didgeridoo (and, if you have ever heard one, you might think that that is a good thing). Instead, you buy a “product” with little true value, if any. Buying this “product” simply gets you into the pyramid of people passing money up the pyramid and hoping to receive money from people you persuade to join the pyramid below you.

     There is nothing illegal or wrong about a chain letter, maybe just irritating. In fact, some of the most wide-spread Internet hoaxes involve one of the basic chain-mail patterns: “send this message to everyone you know,” with the promise that you'll get a free trip to Disney World if you do or that your didgeridoo will go out of tune (not that anyone could tell) if you don't. It is only when money is exchanged that the harmless chain letter qualifies as a pyramid scheme, legally, a form of gambling or fraud. A variation on the pyramid scheme is the Ponzi scheme, in which dividends are paid to the first investors out of the money collected from the newer ones, but you aren't likely to find many examples of that.

     But, what is wrong with a pyramid scheme? It is such a nifty way to accumulate a fortune without having to do anything more strenuous that count the money as it pours in. Is the big bad government just trying to keep us from getting what we deserve? Let's see…

     You receive an e-mail with six names on it. You send a dollar to each person, remove the top name, add your name to the bottom of the list, and send the message on to five more people, each of whom sends it on to five more, each of whom... Let's assume that everyone who gets the message responds to it with money and more messages.

     As the pyramid grows below you, here is what should happen (and, as you look at these numbers, you see why this is called a pyramid scheme):

 

Step  1  2 3 4  5 6  7  8  9 10

New members 1 5  25 125  625 3,125 15,625 78,125 390,625  1,953,125

Total members 1 6 31 156 781 3,906 19,531 97,656 488,281 2,441,406

     If, instead of five recruits each, you get ten, by the time you reach this tenth step, you'll have 1,000,000,000 recruits with a total of 1,111,111,111 participants. By the time you go up one more step, you can't have enough people on earth or the Internet (whether or not they would participate) to meet the obligations to keep the scheme going.

     It does not work, except for those who get in early. Most participants lose their original investment. The pyramid must fail because we have a limited number of potential recruits. Pyramid schemes depend on an ever-increasing number of new participants. Those numbers make the scheme so appealing. Look at how many people are just waiting to hear from you to send you some money. The limit to the number of participants is not in fact the number of people on earth—over five million—but the number of people who could and would participate. Remember, to reach everyone on earth, you might have to figure out how many seashells equal a dollar.

     Once again, if it sounds too good to be true, if it promises you great wealth with little effort, you are most likely going to end up with less wealth than you have now, and you may end up with criminal charges against you. Invent a better mouse trap, or, perhaps, a better mouse. Grow a better watermelon. Do something—that's the old-fashioned way of making money.

     Although I have found a number of links about pyramid schemes, none of them add anything much to my argument. The case against multi-level marketing is more complex, and Dean Van Druff has outlined it well in “What's Wrong with Multi-Level Marketing?” and provides some especially good links.   For all things business related, start at the Better Business Bureau.

     Now, if you will forgive some shameless self-advertising, in the Rovin' and Ravin' archives, you'll find “Get Your Free Trip to Disney World,” about legal but annoying e-mail hoaxes.  You'll find two articles on the heady mix of money and Internet. First, “Free Money on the Internet,” and then “Even More Money on the Internet.”  And I've already given you a link for an article on the didgeridoo.

     Keep your feet dry, your money in safe investments, and your heart full of noble thoughts and sweet songs of the didgeridoo, not purchased, I hope, through a multi-level marketing program.