Have you or your friends ever entered a pyramid scheme?
I set off explain Ponzi chemes, but felt compelled to write a bit about pyramid schemes as well, since they are both similar in their promise of great returns, and their inevitable collapses.
First of all a pyramid scheme is never usually called a pyramid scheme when the idea is being sold to people. A pyramid scheme is a fraudulent investment plan based on a hierarchy.
A pyramid generally starts with one person. This person may ask someone for say $100. That $100 is what this person earns from the pyramid, and act as an entrance fee for the person that handed it over to them. The second person is now expected to recruit other people. For the purpose of simplicity we’ll say the 2nd person are expected to get 10 other people. Once they’ve found 10 people to join by each “investing” $100 they’ve made $900 on their $100 investment ($1000 minus $100 for joining). In the simplest versions of these schemes, the money coming from the 3rd layer goes to he people in the 2nd layer. The person who started the pyramid doesn’t make any more money after he receives his 1st payment (unlike in a Ponzi scheme).
The problem with the pyramid is that as it continues it becomes increasingly harder to find people. Some people that are approached may have already heard of the scheme. If the goal is for each person to recruit 10 people, the pyramid would have reached every person on earth in about 10 layers. If the recruits are supposed to get 3 people each, then it would take about 22 layers before you ran out of people on earth to bring in. Since people generally contact people around them, it usually only takes a few rounds before they pyramid unravels, and a lot of people realize they have lost their investment. Some of the investors involved may also lose friends.
When it comes to money, and investing, many of us are pulled in by the idea of making a lot of money by using a little. Big returns are always appealing. The problem here is that the returns are too great. They are simply too good to be true. On top of this, the investor is expecting a 900% return without any actual service being rendered. The deal sounds so sweet that some may ignore the voice screaming “Bulls#$%!” in the back of their head, hand over the money, and hope for the best. Listen to that voice. It is important to always be skeptical of investment plans that offer quick and high returns. Investing is generally a slow process, and generally only works because the money you invest is being used for lending, buying capital, etc.
If you explain your plan to your friends and they all roll their eyes, they may be right. There are definitely good investments out there, but they can sometimes be hard to find. You may also have to spend a little more than $100 to get back $1000. It takes a bit of time and effort to find out what ‘s right for you.
Be careful out there.
Posted By: Tahric Finn