C.J. Marshall: Significa: Let the pharoh's keep the pyramids
I'll confess that crime is one of my guilty pleasures - or more specifically, reading about criminals and how they perform their dirty deeds.
One of my favorite categories is the scam artists and what techniques they employ to fleece their unsuspecting victims out of their hard-earned cash. Believe me, it's a fascinating subject, exploring the various methods these people use in their never-ending quest to avoid honest work.
So this week, I decided it would be fun to write about one of the most popular - and notorious - scams being used by con artists throughout the world - the pyramid scheme.
A pyramid scheme is extremely simple to organize and operate; hence its popularity with the con artists. Basically, the way it works is the initial organizer - sometimes referred to as the "pharaoh" - convinces a number of people to invest in the plan. It can be any number, but for the sake of ease, let's say five. The pharaoh makes a pitch to the investors, saying that if they join the club for a fee - let's say $500 - they will quickly recoup the cost of their investment and see a never-ending stream of profits come rolling in.
After collecting the money - which means the pharaoh has already made $2,500 - he then informs the new members that they must each recruit five additional people to join the organization. He probably assures his colleagues (i.e. the "marks") that it should be simple for them to recruit five people, especially when they can demonstrate how easy it is to make money using the system. The members dutifully go out, recruit five people - 25 new members in all - who in turn pay the $500 fee to join the "organization." The pharaoh now has an additional $12,500, part of which he shares with the original five team members as their reward for bringing in the new recruits. If he were to split the profits 50/50 with the original team, they would probably be very happy. They would split $6,250 between themselves which would mean they would each get their initial $500 investment back, plus a $750 profit - a more than 100 percent return on their investment. The pharaoh in turn would keep the rest of the cash, in this case $6,250, as his "cut."
Not bad, many people might say. Very little work involved, no risk. What's not to like?
Plenty, as I will get into momentarily. For those who are admiring this description, I'd better point out now that pyramid schemes are illegal in the U.S. and many other countries as well, with good reason.
OK, the pharaoh promises his initial investors that the way the system works, he will continue to share the profits with each group of members is that as soon as each new tier is added. So the five original members, flush with their new profits, go back and inform the 25 they recruited that they have to in turn recruit five more members for the next level. They tout the money they recently made in the system, which inspires the new members to fulfill their obligation.
So the next tier is made up of 125 members, who bring in a total of $62,500 to the organization with their membership fees. The pharaoh, wanting to keep things going, once again splits the profits 50/50 with the 25-member tier, providing the same profit margin that went to the original five members. In turn, to keep those five members happy, the pharaoh also pays them a bonus - let's say $1,000 to each of them. The rest the pharaoh keeps for himself, clearing $26,250.
Things are going well up to this point, but its about to get tricky, and evolve into the impossible. If you know mathematics, you can probably see where this is going. To fill the next tier will require 625 members. That's an awful lot of people, no matter where you live. Still, there are places where pyramid schemes have gone on for a considerable period of time before things go bad. One important thing to remember though is that you can't cheat. Each tier must be filled with the required number of people before the system can go to the next level. Otherwise the system collapses.
All right, it might be a bit difficult, but not impossible to fill the next level. Especially if people are going around, bragging about how much money they made in the system. As the old saying goes, nothing succeeds like success, and there will always be people attracted to the lure of quick and easy money.
The $500 fees from this level will bring in a total of $312,500. After the pharaoh has paid out the money necessary to participants in the higher tiers, he would receive a profit of over $125,000.
It's easy to see why this scam is so popular. The organizer doesn't have to do much after recruiting the original investors, he just sits back and waits for the money to come in, then keeps the lion's share for himself. Those who are early members of the organization are generally pleased, because they keep on receiving a share of the money from each tier as they are created. But now it starts to get really complicated.
In order to fill the next tier of the pyramid, you will need 3,125 members. Whoa! That's an awful lot of people, right? More than the population of many of the communities in Bradford County. Still, thanks to the Internet and other sources, as well as persistence by the unscrupulous, it is not impossible. The money generated by the fees of these members would total $1,562,500. Sometimes the pharaoh will just opt to "take the money and run" at this point, but if he decides to keep things going, he would still receive a profit of over $500,000.
It's important at this point to remember that the only way people new to the organization will receive any money is when they go out and recruit their quota of five members. So now you've got over 3,000 people eagerly wanting to receive their share of the profits generated within the system. But in order for them to do so, a total of 15,625 would be needed to fill the next tier.
As you may have already guessed, the problem is the pyramid system is based on geometric progression. The more you have, the more you need to keep the system going, and as each tier gets bigger and bigger it becomes more unwieldy and difficult to fill. The next tier would require 78,125 people to fill it, and the next tier after that would require 390,625 new members. By the 13th or 14th level, more members would be required to fill it than there are people are on the earth. So no matter how long the pharaoh can keep things going, it will eventually reach a point where the system will collapse under its own weight, and the investors on the last tier will be stuck with a loss.
Despite this, pyramid schemes have been so popular in certain countries that they can threaten economic upheaval when they go bad. That's why they're illegal. Sometimes con artists will try to "mask" a pyramid scheme's nature by incorporating low cost goods with the "services" they provide. But each one still shares the same practice - namely that in order to make money, members must go out and recruit new members into the system. Trouble is, by its very nature such a system cannot sustain itself over an extended period of time, and is always doomed to collapse, and the only "winner" is the initial organizer - the con artist - in such circumstances.
C.J. Marshall is a writer and columnist for The Daily/Sunday Review. He can be reached at email@example.com.