Beware the Pyramid Scheme

Every age has its peculiar folly: Some scheme, project, or fantasy into which it plunges, spurred on by the love of gain, the necessity of excitement, or the force of imitation.

Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay

Probably one of the first scams people interested in starting their own home business run into is a pyramid scheme and I was no exception. To my embarrassment, the brand of pyramid scheme that took me in when I first began was the classical chain letter (this is back in the dark ages about 10 years ago before most people had email).

I already knew about the bad reputation that chain letters had and I knew that most of the people who sent them out never made any money but desperation seems to shut down the critical reasoning areas of your brain and I was able to ignore the downsides while convincing myself that if I got creative enough this would work.

For those rare people who have never received one I'll explain how they work. The typical chain letter will have a list of about five names and addresses and you are suppose to send a dollar to each person on the list. Then you are suppose to put your name and address at the top of the list and remove the name of the person at the bottom. You then mail the letter to five people that you know. If everyone who receives this letter follows these instructions you wind up receiving thousands of letters with a one dollar bill inside.

This sounds great at first glance and it did make the first people to start chain letters very rich but if you follow it to it's logical conclusion you'll realize why it's now considered a scam (it's also illegal). Even if everyone followed the instructions exactly, the only people who would make money are the people who got started before everyone else got involved. Since the letter goes out at an exponential rate it doesn't take long before everyone has received their copy of the letter so who do the last few people who get the letter send their letters to?

Most people are immune to this form of pyramid schemes now but this concept has proven to be remarkably adaptable and has taken many other forms. Since I could never possibly cover every form it has taken I'll just leave you with some basic questions to ask yourself when you come across a new opportunity...

1. Does it have an inherent benefit that is worth whatever it costs to participate? For example, if there is a product involved would you buy that product even if there were no business opportunity attached AND for the price that it is offered?

2. Does it require that you recruit other people in order to get your benefit?

If you would like to read more I recommend you read the information from the US Postal Inspectors about Chain letters and Wikipedia has a nice article about pyramid schemes in general.