HOW TO RECOGNIZE A PYRAMID SCHEME - And Why You Should Run if You Do!

by Lynn Fowler Helping Others to Succeed How do you recognize a pyramid scheme? Firstly, let's look at how things work. Unless you win the lottery or Great-Uncle-Fred-Whom-You-Never-Knew-Existed dies and leaves you his millions (neither of which rates very highly on the probability list), there are basically three ways you can earn money:

1. You can work for it.

2. You can get someone else to work for you, and benefit from their labor.

3. You can get your money to work for you, and bring in more money.

The obvious, tried and true method - you give your time and labor in exchange for money - works, and despite the jibes about "job" meaning "just over broke", has put bread and butter on the tables of many before us. Sadly, many people think that when they move away from the "job", they will also move away from work. Unfortunately, the free lunch is sold out. No matter what other means you use to earn money, it will still involve work.

Getting someone else (or lots of someone elses) to work for you means is that you are able to multiply the volume of work. Even though this inevitably means that you earn less per unit of work, there are vastly more units performed, therefore more money in your pocket.

This works, however, only if the people under you actually work. If all they ever do is recruit more people, who also only recruit others, and so on down the line, no income is being generated. That means no dollars in your pocket or in anyone else's. You will end up broke, but with a big organization.

That leaves getting your money to work. Dollars are not rabbits: they will not multiply if you leave them alone in a dark corner. The only way they can make more dollars is by working.

You can put your dollars to work in several ways:

1. You can use them to buy something which you can sell at a profit.

2. You can use them to buy the raw materials to manufacture something you can sell at a profit.

3. You can use them to pay someone else to do work from which you will profit.

4. You can use them to buy something that someone else will pay you to use.

5. You can lend the dollars to someone who will pay you interest while they have the use of them, and eventually return the original amount to you.

Now, in a pyramid scheme, people do not work other than to recruit new members to the scheme, and money does not work. The only money generated into the scheme is what is paid as an entrance fee by each member. Since that entrance fee does not generate any other money along the way, the only thing that each person can take out without destabilizing the whole structure is what they put in.

Take a very simple pyramid. Say each person has to put one egg into the basket, and to recruit two new people for his next level. When his fourth level is complete, he can withdraw eight eggs and make an omelette. Here's the matrix:

Level 1. You. 1 egg in the basket. Average 1 egg per person in the scheme.

Level 2. You plus 2. 3 eggs in the basket. - 1 egg per person.

Level 3: You + 2 + 4. 7 eggs - 1 egg per person.

Level 4: You + 2 + 4 + 8. 15 eggs.

Now your four levels are complete. You take eight eggs and trot off to enjoy breakfast. BUT, now there begins to be a problem. By taking your 8 eggs, you leave only 7. Divided by the 14 people left in the scheme after you go, this means the basket now contains only an average of half an egg per person, instead of one.

As each successive level comes to the top, grabs their eggs and heads for the frypan, the average number of eggs for each person remaining in the system decreases. In this particular matrix, it takes only 12 generations before the average is 0 eggs per person! And that is assuming that it all works perfectly, with every person recruiting the required two others. If even a small percentage fail to recruit, or if people recycle to the beginning without any further input of cash, the whole thing falls in a heap even more quickly. Remember also that the "reward to investment" ratio in this simple example is much less than that offered by most pyramid schemes, which collapse even more easily.

No matter what kind of matrix, or what format you use, sooner or later, the results will be the same. The only money coming in is the entrance fee for each participant. That money is not working. It has not generated any other money along the way. There are only two possible outcomes: either each person walks away with the money he put in (which kinda defeats the purpose of having a scheme in the first place); or a few people walk away with the money that lots of other people put in, and a lot of people walk away with nothing.

To recognize a pyramid scheme, ask two questions: (1) What income is being generated into the scheme? If the answer is, "Only the member's entry fees" then don't walk, RUN away. (2) What do the members do to make the scheme work? If the answer is "Only recruit more members", run.

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Created on Dec 31st 1969 18:00. Viewed 0 times.

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