Pyramid Schemes

Topics: Fraud, Ponzi scheme, High-yield investment program Pages: 5 (1861 words) Published: May 5, 2013
Scams are happening all around us, and we often don’t even notice them. Pyramid schemes are very harmful towards investors, and are hard to watch out for unless you know exactly what they are, why they fail, the effect of the failure, common victims, how to avoid them, and how to prevent them from spreading. More individuals are hurt than are helped when dealing with these scams. Individuals should be more informed about pyramid schemes, because they can be easily disguised. Participating in scams, will more than likely lead to a loss in money. “A pyramid scheme is a get-rich-quick business fraud that usually hurts investors in the end” (“Pyramid Schemes”). “Pyramid schemes need a constant supply of new participants in order to survive, so they must advertise broadly” (Hobson). These new participants only make money by recruiting more members to join (Coward). Without recruiters, this scheme would not exist. However, everyone on earth would have to be involved if a scheme consisted of ten layers of new recruiters. “The bottom layer of the human pyramid would have more than four and a half billion people, and it would have to be 60 feet high” (“What Is A Pyramid Scheme?”). Overall these schemes will lead to a bad solution, because there are not enough people on earth to fulfill a successful ending. “These schemes are much different than games of chance, like the lottery, because the leader is always the winner and a majority of the people below him always loses” (Danger Posed By Pyramid Schemes & Network Marketing Programs). These loses are dealt with throughout the world, and the product-based and naked pyramid schemes are the two most commonly used to lead individuals to failure (Roos1). In a naked pyramid scheme no product is sold (Roos1). “A usual naked pyramid scheme would be structured as followed: one person recruits ten other people to participate in a “no-fail investment opportunity”, one hundred dollars is given to the recruiter by the ten recruits, the recruiter then tells the recruits to go out and find ten more recruits to do the same, and if successful, all of the recruits will be left with a one hundred dollar investment” (Roos1). A product-based pyramid scheme is almost the same as the naked scheme; however, it is disguised as a sales opportunity (Roos1). “A common product based pyramid scheme would be structured as followed: a leader recruits ten salespeople who each pay five hundred dollars for a starter kit of products to sell, ten percent of each starter kit that’s sold goes to the leader, ten percent of each product that any of his recruits sells also goes to the leader, including starter kits, the recruits are told that the fastest way to make money isn’t by selling products, but by recruiting more people to buy starter kits, and the leader and recruits at the top of the pyramid receive more money from everyone below them on the pyramid” (Roos1). Since the bottom of the pyramid cannot keep up with the top, the Pyramid schemes often end up falling apart. “It’s mathematically impossible for every recruiter to make money in a pyramid scheme” (Roos2). For example, each recruit has to find ten more people to gain back his/her initial investment. Once the recruit reaches the eighth level of the pyramid, the person must recruit a billion people to make back their money and the next level would be almost twice the population of the Earth, ten billion (Roos 2). Eventually, there won’t be enough recruits at the bottom of the pyramid to support the level above it. This is when the pyramid begins to fall apart and everyone at the bottom loses his/her investment. (Roos2) “Studies show that in a naked pyramid scheme, 90.4 percent of people lose their money. While in product-based pyramid schemes, that number increases to a 99.88 percent” (Roos2). According to Danger Posed By Pyramid Schemes & Network Marketing Programs, when these pyramids fail it can cause major damage towards an individual’s life....
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Ponnzi Schemes Essay
  • Ponzi Schemes Essay
  • Ponzi scheme. Madoff financial fraud. Essay
  • The Ponzi Scheme Essay
  • Essay about Ponzi Scheme
  • Essay about Earl Jones Ponzi Scheme
  • Essay on Bernie Madoff Ponzi Scheme
  • The Ponzi Scheme (Bernard Madoff) Essay

Become a StudyMode Member

Sign Up - It's Free