An Example Pyramid Scheme: A Diagram for DisasterWhat makes an illegal pyramid tick? And why is it doomed to fail? This example pyramid scheme quickly answers these questions. Below, we'll demonstrate a fairly simple and fairly common pyramid scheme structure: the 3X4 matrix. This example will more clearly demonstrate how money might move from the base of the pyramid up, and it will illustrate why illegal pyramids eventually fail. The ExampleWe'll keep things at a small-scale to best illustrate the point. Say an illegal pyramid opens up in a small town with a population of 100 people. The scam works as follows. The scammer running the pyramid recruits 3 people and tells them that they will earn money on the next 4 levels of recruits. This is known as a 3 X 4 matrix (3 recruits X 4 levels of payment). Here's how the scheme pays out... Pretend you are one of the three recruits the pyramid operator brought into the program. You paid $100 to get in, and you get a chance to make a profit on the people you bring in. For the 3 people you bring in directly (level 1 payment) you receive a $30 cut of the $100 entry investment. You instruct your three recruits to each recruit 3 more people. For each of the people your recruits bring into the program, you earn $5 dollars of the $100 entry investment (level 2 payment) The recruits of your direct recruits repeat the process, and again, you earn $5 of each $100 dollar entry payment (level 3 payment). This process continues one more time. Like the last time, you receive another $5 of the $100 dollar payment (level 4 payment) for the newest level of recruits. You tally your share of the entry payments and find you made $675! Minus your investment, that's a $575 profit for our example pyramid scheme Unfortunately, in our scenario with the small town, the example pyramid scheme will have collapsed before reaching level 4. Here's why: the necessary pyramid base outgrew the recruitment pool. Let's break down the numbers. The pyramid opens, and the con-artist brings in 3 recruits, if each of those 3 recruits brings in 3 recruits and so on and so, here's what will happen. 1st Tier of Investors = 3 individuals (Brought in by the operator) With all 4 tiers, that's 20 people more than the town's available population. Because our example pyramid scheme requires more people than the town has available, the pyramid will breakdown before level 4 is filled. The investors (victims) in Tier 4 never get the opportunity to recoup their $100 dollars and begin to profit. Likewise, Tier 3 has only recouped a portion of their $100 investment. The investors in the top two Tiers have recouped their money and begun to profit, but they fail to cash-in on the full $675. If the pyramid filled out evenly as above (unlikely) then only 12 people (top two Tiers) profited. 27 people failed to recoup the entirety of their initial investment, and 61 people failed to make any money whatsoever. In this scenario, 87% of investors lost money. Granted, 100 people is small recruitment pool. But, in the end, it doesn't matter how large the recruitment pool is, because you will ALWAYS need new people to sustain the pyramid. The world's supply of investors is not infinite, and eventually, the pyramid will require more money from new recruits than there are potential investors entering the recruitment pool. From A Larger PerspectiveLook at it this way. Say we take the entire world's population of 7 billion people (an overestimate) and say each is person is a capable investor. They each invest into the illegal pyramid. That means the total amount of money in the scheme is $700,000,000,000. That $700 billion dollars is the MOST that can be in the system at once (there are no more investors left on the planet). Now, without investing that money and merely redistributing it, how can you possibly give more than $100 to every single person? The answer: you can't. If you only have $700 billion dollars, the most you can give every single person is $100 (700,000,000,000 dollars / 7,000,000,000 people). At best everyone gets their initial investments back. You can't give someone more money, without taking it from someone else. If at least one person profits, then at least one person loses. Unfortunately, if everyone entered the 3 X 4 matrix in the example pyramid scheme mentioned earlier, the situation would be even worse, because the available money for redistribution is cut by the scammer's percentage of the entry investment. The scam operator's cut equals the entry investment minus the money paid to each recruiter per level. It works out as below: $100 - $30 - $5 - $5 - $5 = $55 That means, for every $100 entry fee, the illegal pyramid's operator collects $55 (55%). Also, because he's part of the pyramid, he collects $675 dollars like anyone else who fills all 4 levels of referrals. Moreover, because there is an absence of recruiters in the first three tiers, the scammer collects an additional $495. So, let's figure out how much of that $700 billion dollars is still available for investors. ($700,000,000,000 X 45%) - $675 - $495 = $314,999,998,830 So, once, the scammer takes his or her cut, the rest of the pyramid is left with a little under $315 billion dollars to redistribute. Remember, the entire world's population has entered our example pyramid scheme, so there can be no new investors. At this point, not everyone is capable of recouping their investment. Even if the $315 billion was redistributed equally, everyone would be out roughly $55. Even taking into consideration new births and people reentering the pyramid after filling all four levels, the base of the scheme will grow more quickly than the recruiting pool and outstrip the world's population. Even to complete just one more level in the example pyramid scheme, the world's population would have to grow from 7 billion (number of currently involved investors) to 21 billion (number of investors needed for next level). Return from Example Pyramid Scheme to Pyramids Schemes Page
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