Tuesday, November 18, 2008

Pyramid Schemes

Recently, I've taken an interest in Pyramid schemes. No I wasn't taken by one and no, I don't plan to start one. I just wanted to know more about them (can you sense follow-on posts?)

So I did some research and found out about a simple one called "The Airplane Game". You've probably heard about it, but understanding it will help you understand more pyramid schemes. There are several variations, but I'll focus on a small, simple one.

Let's say you get together with 2 of your best friends, you appoint yourself as Pilot and the other two as co-pilots. They each "recruit" two stewardesses (or would in be stewardi?). The Pilot in this game has one responsibility, that's to collect money. The co-pilots do less than that (after the initial recruiting), they just wait on the next round. Oh, sure, they collect from the stewardesses, but they pass it to the pilot.

The stewardesses have the toughest job. They have to recruit passengers. The go find two of their friends for this. The passengers each pay $1 to the stewardesses who pass it to the co-pilots, who pass it to the pilot. At the end of round 1, the pilot collects $8 (for $0 invested).

Now it gets fun. The pilot comes over the intercom and announces that the flight will split. He's retiring and each of the two co-pilots will be promoted to head up their own flight. The stewardi will be promoted to co-pilots and each passenger has the privilege of moving up to the stewardess role and recruiting two new passengers.

The goal here is to be pilot of your own flight. The beauty of this is that it only takes four rounds to get there. The payoff is $8 for every $1 invested, so you might change the flight cost to $100 (and $800 payoff) or you might even play multiple times. Say you sign up as a passenger under two different stewardi, you'll get paid twice.

What could be better? Well, doing something legal might be better. Or moral. Or ethical. Choose at least one. Dave Ramsey always says that "He who hastens to get rich will not go unpunished." I hope he's right about this when it comes to the airplane game. But where does this fall apart?

Well, it's very simple the game can not run forever. If you assume (falsely) that EVERYONE will play the game, by that I mean every man, woman and child in the US, the game can only last 25 days (based on 2007 population estimate of 303 million). Since you can't sucker everyone, it will end sooner. When it does, all of the passengers (about half the people), all of the stewardi (another 1/4) and the co-pilots get $0. That means 93% of the people get nothing, 7% get 800% return. Pretty lousy returns.

The word for this kind of game is FRAUD. Pure and simple. Let it be known, that if any of my family tries to do this, I WILL TESTIFY AGAINST YOU. Remember this is the man who never asked "Do you want me to stop this car?." Or at least never asked it twice. Instead, I stopped the car. I should also note that I haven't posted anything here that you can't find some other place, such as wikipedia.

So why am I writing about Pyramid schemes? Well, the answer to that will have to wait for another day.


Adam said...

Two comments:

1) Ramsey quotes the Bible that says "Wealth obtained by fraud dwindles, but the one who gathers by labor increases it"(Proverbs 13:11 NASB) and " A stingy man is eager to get rich and is unaware that poverty awaits him"(Proverbs 28:22 NIV).

2) I was one of the 93% in high school...Lost $1K. Ask me about it some time.

Randy said...

Adam, thanks for dropping by. Those are the two quotes I was thinking about (the second is a little more direct). My version is a little more colorful and I think I've heard Ramsey say it that way. But you're right, we need to go back to the Book to verify it.

I've heard part of the 93% story, but not sure I ever heard it all. Maybe on the way to the ball game. In reality, it's probably better that you weren't in the 7%. It's a lesson you now remember...

What is Ramsey's catch-phrase for the $1k?

DJ Black Adam said...

Just adding you to my blog roll Randy, we may disagree on a few things, we agree on a few more, and I enjoy reading your blog.

Brooke said...

Interesting. I've never understood why the people on the bottom join up.

I can't wait to hear the answer to your question, Randy!

Randy said...

djba, thanks for adding me. When I get a chance I'll return the favor, I don't update my blogroll often..

Brooke, it's pure and simple greed and the belief that you can get something for nothing.