Do pyramid schemes always collapse?

A house of cards on my desk

A house of cards waiting to fall

Virtually everyday I get an email that promises to make me rich. Sometimes I read it to amuse myself, but it always goes in the bin. These emails normally come from a stranger. Today I got one from a friend. I was surprised; doesn't everyone know these things are always rubbish?

The email I received had the subject 'seems viable??' and after my friends greeting spoke of the wealth I would receive if I would give the scheme a go. It claimed to be a Multi Level Marketing scheme, but was really just a Pyramid Scheme.

This email had five names on it. The one at the bottom was my friend's. All I needed to do was send the top person £3 via PayPal, take their name off the list, add my own to the bottom and convince at least 5 more of my friends to do the same by sending the email out to as many people as possible. If each of my five recruits get 5 more recruits and each of those recruits get 5 more, and so on, by the time I'm number one I will get £9,375.

These schemes are called Pyramid Schemes because under each person who joins, there need to be a greater number of people willing to join. The problem with these schemes is that you eventually run out of people willing to join and then the scheme collapses. This actually happens a lot quicker than you might think and the only person likely to benefit is the person who started the scheme.

The email partly acknowledges this and says:

The problem with these types of scheme is that usually they run out of people to pass onto - but with 78 million [PayPal] users and more joining every day, how likely is that?

As the number of new recruits needed goes up exponentially, it is very likely indeed. If I was to join the scheme I would need 3,905 more people to join the scheme. All of these people would need 3,905 new members for them to benefit.

The following list shows how the number of people in the pyramid increases as the number of levels goes up.

  1. 1
  2. 6
  3. 31
  4. 156
  5. 781
  6. 3,906
  7. 19,531
  8. 97,656
  9. 488,281
  10. 2,441,406
  11. 12,207,031
  12. 61,035,156
  13. 305,175,781

According to PayPal's website they actually have 100 million users. So, even if they were all willing to join, it would only support a Pyramid with 12 levels and the bottom 5 levels would not receive any money.

If 100 million people weren't willing to join this scheme and only 2.5 million did then you'd have to be on level 5 of the pyramid to profit. So unless my friend is the mastermind behind this scheme I don't think she'll get rich from it. I don't think she expects to. It was only £3 and I guess she thought it was worth a try. I suppose she might get a bit. I'll ask next time I see her, but I think I'll give this get rich scheme a miss.

Rigbee Dugane said

If only everyone were as wise as you. Can you write an article about playing the lottery next? I've got some friends I'd like to show it to.

Richard Garside said

@Rigbee the lottery is not as bad. It's sustainable and there is a reasonable chance of winning a small prize. The chances of winning a big prize are incredibly small, and I figure I've won more money by not playing than I would have done playing it.

The UK lottery started on 14 November 1994. It costs one pound to play. If I'd played once a week since then I would have spent £620. That's £620 I can put towards my manor house and speed boat.

According to their website there is a 1 in 54 chance of winning at least £10. So if I had played since the UK lottery started I could have won £110. I guess I'm never going to get my speedboat.

Rigbee Dugane said

According to their website there is a 1 in 54 chance of winning at least £10.

@richard that's the part people don't seem to understand. If I offered someone $10 and asked them for $54 dollars in return, they'd think I was crazy. But they keep plunking down that dollar a week (or $5, or $10).

It's like going to the casino. People don't stop to think that the lights and fountains and statues and landscaping are all paid for by people who've lost money gambling there. In the long run, the house always wins.

Now, if you're playing the lottery or going to the casino purely for entertainment, and not as a way to increase your income, that's one thing. But when you have people on welfare buying lottery tickets or people using their credit cards to buy chips they can't afford at the casino, there's a problem.

Richard Garside said

The lottery should just be for fun. It's not a serious way to make a living or break out of poverty. If I was to play for fun I'd stick to one ticket a week or join the work syndicate.

As I've not played the UK lottery ten times a week since it started I have in fact made £6,200. Perhaps I can afford that speed boat.

Rigbee Dugane said

Heck, wait until you've saved enough for an ocean-going craft. Then you can come visit us in San Diego. ;-)

Steven R said

Hence the phrase, "You do the math."

Chris Magee said

Using Paypal in a pyramid scheme is also against Paypal's Terms of Use agreement. If you participate, you can lose your Paypal account.

As always, if it sounds too good to be true...

ScrambledHeads said

Casino's aren't all bad I just doubled my money going to one (first time ever), although I have now had to give my card to my best friend as she doesn't trust me not to go again (she's right). There really is no way to make easy money, best to do things you enjoy and hope you can make enough to be comfortable along the way.

Richard Garside said

@ScrambledHeads the house always wins in the end. Your friend sounds wise. Best to stop while you're ahead.

I've only been to a casino once. I helped my friend lose £10 quicker than she could do by herself.

Jimmy Havok said

Went to Vegas a few years ago, and we walked into a place called "Slots o' Fun." They give you two free pulls on a giant machine when you come in the door: I got $5 in quarters out of it. I put them in my pocket and said, "OK, let's go." My friend looked at me like I was crazy and said, "Aren't you going To try to get more?" "Nope, they gave me five bucks, I'm not going to give it back."

I ended up spending in the videogame section of Circus Circus. I figured that there, I knew what I was buying, and it was a lot more fun than pulling a lever and watching wheels spin.

Richard Garside said

@Jimmy Havok pulling levers is only going to amuse for so long. I've never understood the appeal. I think you did right.

I've always been quite amused by those 10p machines (possibly called something else in America) where you put 10p in and it pushes money to the front where it spills out of the front every once in a while. I once walked past one and over £3 just fell out of it. It made me incredibly happy for a while. Funny how winning stuff does that to you.

On a similar note. A friend was telling me how he used to work in an amusement arcade and the things they had to do to stop people winning too much. It was his job to loosen the screws on the grabber that tries to pick up the cuddly toys.

Jimmy Havok said

@Richard funny how pulling levers amused our own Virtue Czar, William Bennett, to the tune of several million dollars. I wonder if he had some sort of subconscious wish to get rid of money he felt guilty about taking.