Can anyone explain what a pyramid scheme is?

Does it have anything to do with that pyramid thingy on our paper currency?

You have bought 5 products or services from a company, but they will give you a discount if you get 5 other people to buy 5 additional products or services. Then they will get a discount if they get 5 other people to buy 5 additional products, etc.

Maybe someone else has a better explanation.

pyramid schemes were popular: (please forgive the crude drawing)



The idea is you would buy a "seat on the plane" as a "passenger" for $500. As more people come on board (as YOU sell more "plane seats"), your money increases exponentially. By the time you're a "pilot" (the two red dots), you stand to make around $8000. IF more passenger seats are sold, and IF the whole thing doesn't fall apart. (I never went for it, but they were being done in Charleston and Columbia SC at the time I was "invited" to buy a seat.

and the people at the bottom end up losing their shirts. You don't get any money unless you bring people underneath you. If everybody is in the pyramid, there is nobody to add to it so you lose all the money that you put in.

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.