Reply #4: not connected to dollar graphics... [View All]

The term refers to the shape of the investment pool, it is shaped like a pyramid. Here's a very simple example: If I convince four people to "invest" $10 in my "business" and promise to help each of them recruit 4 new investors and give them 1/2 of each new investment...that is a rudimentary pyramid scheme. It actually works, for the very small group at the top.

In my example, I got $40 ($10 from each of the 4 "2nd level" investors). If the 2nd level people each get 4 3rd level investors (16 total), each of the 2nd level folks doubled their investment (1/2 of each new $10) and I get another $80 pure profit and in this scenario, I'm out and have made $120 for nothing. The 2nd tier needs the 3rd tier to each find 4 suckers to creat a 4th tier (now 64 new investors). If that happens, tier 2 each get $80 and retires.

Obviously, the problem is that tier 5 = 256 people, tier 6 = 1024, tier 7 = 4096, tier 8 = 16,384, tier 9 = 85,536 and on, and on. Real quick the numbers don't make any sense and lots of people lose their "investments". My example is extremely simple, most pyramid schemes I've run into work on multiples of 8 or more (more than 2 million investors by level 8!), some (but not all) have some actual product involved, and all are doomed to failure after a relatively few cycles.

Worse, my example shows an "honest" scheme--most aren't.