Pyramid schemes are mathematically improbable

Portsmouth Herald/January 1, 2003
By Karen Dandurant

Concord -- Just about everyone is familiar with those annoying chain letters.

You know - you send $1 to the person at the top of a list, add your name to the bottom and eventually you are supposed to receive lots and lots of dollars.

The simple truth is there are no get-rich-quick schemes. Consumers who receive these solicitations in the mail, or through the Internet, need to know they don't work, and the likelihood of making any money at all is very slim.

Called pyramid schemes, the initial investment can range from small to large, and in some case the losses can be huge. The schemes can involve donations to groups or so-called business opportunities.

What they have in common is that a participant must recruit more and more people, and those people must recruit other people, and so on, endlessly.

Assistant Attorney General Connie Stratton, of the state Consumer Protection and Antitrust Bureau, said they never work.

Jon Taylor, president of Consumer Awareness Institute, and director of Pyramid Scheme Alert in Utah, said it is mathematically impossible for anyone, except those at the very top of the pyramids, to make money.

Asked to look at an Internet scheme to sell government reports through the mail, Taylor said it reflected a common theme.

"Report chains are prolific on the Internet," Taylor said. "You buy copies of the reports, prepare a list, set up a chain of four and go. It's the same principle as a chain letter. It's not the most nefarious because it involves only a $5 investment. The problem is there are thousands of them out there, tens of thousands."

Taylor said that, mathematically, no matter how far it goes, people lose because the concept is an infinite program but there is a finite population.

"The only way it could work is to go on to other planets, and other universes," he said.

Stratton said all pyramid schemes fall under the category of multilevel marketing.

"There are two different kinds - product-based and nonproduct- based," said Stratton. "The reason they don't work is because they have so many levels of distributors. If you work out the math, what happens is that a very few people make money and the majority do not.

"All the money goes to the top, so you'd have to recruit your way to the top. The problem is that so many people are needed to get there that the market gets saturated and the scheme falls apart."

Taylor said losses range from 93.3 percent in nonproduct schemes to 99.9 percent in product-based offers.

Taylor, whose background is in psychology, mathematics and marketing, has studied pyramid schemes for many years.

He said there are some schemes, like groups called "Women Helping Women," where a donation is solicited. The "donation" can be $1,000 to $5,000, and it results in a much greater loss. He said the fallacy is the expectation that eventually there will be a payoff.

"That's still minuscule to product-based schemes," Taylor said. "I have seen people stay in them for a 10-year period and their losses are $20,000 to $30,000, some up to $90,000. That's tens of billions lost worldwide."

He said these companies are now plundering Asian markets in Japan, Korea, and Singapore and are trying to move into China.

"We are on the verge of a huge scandal. These mostly American-based companies are going to fleece these countries. What do you think that will do for their feelings about our country?" he said.

Product-based schemes are the most damaging, he said, because the return does not come from the product sold, but from the need to recruit more and more people in an effort to work one's way to the top of the pyramid.

"That doesn't happen; there are not enough people in the world," Taylor said. "If you're selling a product and only getting a 5 percent return, it's not worth it. But if you get 10,000 people under you and you get $10 from each person, that's where the theoretical payout lies."

Taylor said pyramid schemes continue to be a problem because no one bothers to go after them.

"The Federal Trade Commission should have made it illegal," Taylor said. "Some of the bigger multilevel marketing companies base their legitimacy on the Amway precedent. They won a challenge in court, so now the other companies figure, if they get away with it, why not us?"

Taylor said companies like Amway and Nu-Skin are huge pyramid operations.

Taylor developed a Web site that lists criteria for evaluating offers that consumers might receive. It includes resources, news of court cases and tools to identify the scams.

"Since that time I have prepared something for the FTC on product-based scams," Taylor said. "They are the most harmful and have the highest loss rate."

Anyone who wants to learn more about pyramid schemes can visit Taylor's Web site at www.pyramidschemealert.org.