How and why pyramid schemes attract people?
A piece of hope, offering enormous returns and luxury life in no time, but actually benefiting only a small number of people, having other people as means to their ends — meet a pyramid scheme. Images of a lush lifestyle seduce people and make them invest in a suspicious pyramid scheme, even though they know what a pyramid scheme is and how it affected other people every time people just say “It won’t happen to me”. Unlike regular companies and even ones employing multi-level marketing, pyramid schemes can not survive for a long time and not only does it have a harmful impact on the individuals who invest, but also on a wider community and a state, since pyramid schemes can not sustainably contribute to GDP.
Ponzi scheme comes across as a great example of delusive yet so attractive yields that it allures people and makes them reinvest over and over not being able to give it up, so eventually, they all lose money when the unsustainable scheme crumbles. In this particular example, Charles Ponzi, the creator of the scheme, offered an unbelievable 100% return on investment to be received in three months. Compared to banks that offered only a 2% yield in the early 1920s this was an unbeatable rate of returns. As with any high-return venture, it came with a huge risk. Since risk management is a not-so-easy-to-master skill, which many incompetent investors simply ignore, high yield did its job and brought an enormous amount of investors into Ponzi’s offices.
It is possible to earn money through a pyramid scheme. Yet a pyramid scheme makes it increasingly difficult to earn money and even to return the investment as we go down the pyramid levels. The first pyramid members show off their achievements to attract new investors and create an impression that the same success is possible for newbies. Nevertheless, the chances are quite different, since it is also progressively more difficult to invite new members, especially through an illegitimate product or services, because in a community there is a limited number of target audience members and it gets quickly exhausted by top levels of a pyramid. Therefore, the lower a person in the pyramid, the less opportunity they get, even though it seems that both, they and the founder of a pyramid, have the same chances.
Finance is not rocket science, but it still takes time and energy to master it. An average person does not look too deeply into it, even though money is a major factor driving everything in modern society. History is also not regarded as an interesting topic for many. Unsurprisingly, exactly those kinds of knowledge determine the ability to refuse to participate in fraudulent financial schemes. Awareness of existing schemes improves critical thinking and protects individuals against scams. Failing to possess critical thinking and knowledge of similar frauds, leads to accepting newly created pyramid schemes and a “this time it will work out” mindset.
When people lose money in a scheme, they don’t have anything to brag about unlike the situation when they actually made some buck. Therefore, it is more common to hear about someone’s success, rather than their failure. This phenomenon is called a “survivorship bias”. Unless a new person deeply analyses a pyramid scheme and the reasons standing behind its success, they will think that the pyramid scheme can change their lives as well. Unfortunately, very few people turn out to be right.
Overall, pyramid schemes are not the only way to lose money, and it is possible to survive just by keeping out. And yet, people join them thanks to the attractive yields offered. The promise of an endless luxury doesn’t leave people indifferent so they get hooked on once-in-a-lifetime opportunities. Most don’t even know how previous pyramids ended and can’t compare and make the right decision. After losing money, a community does not learn a lesson because nobody is willing to speak up about the failure. And the story goes on and on. Long live the Pyramid.