Editing Pyramid scheme (section)

== Concept and basic models ==
In a pyramid scheme, an organization compels individuals who wish to join to make a payment. In exchange, the organization promises its new members a share of the money taken from every additional member that they recruit. The directors of the organization (those at the top of the pyramid) also receive a share of these payments. For the directors, the scheme is potentially lucrative—whether or not they do any work, the organization's membership has a strong incentive to continue recruiting and funneling money to the top of the pyramid.

Such organizations seldom involve sales of products or services with value. Without creating any goods or services, the only revenue streams for the scheme are recruiting more members or soliciting more money from current members. The behavior of pyramid schemes follows the mathematics concerning [[exponential growth]] quite closely. Each level of the pyramid is much larger than the one before it. For a pyramid scheme to make money for everyone who enrolls in it, it would have to expand indefinitely. When the scheme inevitably runs out of new recruits, lacking other sources of revenue, it collapses. Since the biggest terms in this geometric sequence are at the end, most people will be in the lower levels of the pyramid; accordingly, the bottom layer of the pyramid contains the most people. The people working for pyramid schemes try to promote the actual company instead of the product they are selling. Eventually, all of the people at the lower levels of the pyramid do not make any money; only the people at the top turn a profit.<ref>{{Cite web|url=https://www.fbi.gov/scams-and-safety/common-fraud-schemes/pyramid-schemes|title=Pyramid Schemes|website=Federal Bureau of Investigation|language=en-us|access-date=2019-04-18}}</ref>

People in the upper layers of the pyramid typically profit, while those in the lower layers typically lose money. Since most of the members in the scheme are at the bottom, most participants will not make any money. In particular, when the scheme collapses, most members will be in the bottom layers and thus will not have any opportunity to profit from the scheme; still, they will have already paid to join. Therefore, a pyramid scheme is characterized by a few people (including the creators of the scheme) making large amounts of money, while subsequent members lose money. For this reason, they are considered [[scams]].<ref>{{Cite web|url=https://www.scamwatch.gov.au/types-of-scams/jobs-employment/pyramid-schemes|title=Pyramid schemes|first=Australian Competition and Consumer|last=Commission|date=May 14, 2015|website=Australian Competition and Consumer Commission}}</ref>

=== The "eight ball" model ===
[[File:Airplane game.svg|thumb|The "eight-ball" model contains a total of fifteen members. Note that in an [[arithmetic progression]] 1 + 2 + 3 + 4 + 5 = 15. The pyramid scheme in the picture in contrast is a [[geometric progression]] 1 + 2 + 4 + 8 = 15.]]

Many pyramids are more sophisticated than the simple model. These recognize that recruiting a large number of others into a scheme can be difficult, so a seemingly simpler model is used. In this model each person must recruit two others, but the ease of achieving this is offset because the depth required to recoup any money also increases. The scheme requires a person to recruit two others, who must each recruit two others, and so on.

Prior instances of this scheme have been called the "[[Airplane game|Airplane Game]]" and the four tiers labelled as "captain", "co-pilot", "crew", and "passenger" to denote a person's level. Another instance was called the "Original Dinner Party" which labeled the tiers as "dessert", "main course", "side salad", and "appetizer". A person on the "dessert" course is the one at the top of the tree. Another variant, "Treasure Traders", variously used [[gemology]] terms such as "polishers", "stone cutters", etc. One version called the Abundance Fractal uses the four elements as the names of tiers: "Fire", "Air", "Earth", and "Water". A more recent variation known as the Living Workshop takes the names of plants, calling the tiers "seed", "sapling", "blossom", and "lotus".

Such schemes may try to downplay their pyramid nature by referring to themselves as "gifting circles" with money being "gifted". Others focus on sharing circles or educational themes around "abundance" to divert attention away from the unsustainable structure. Popular schemes such as "Women Empowering Women"<ref>{{cite web|author=Tracy McVeigh |url=https://www.theguardian.com/uk/2001/aug/05/tracymcveigh.theobserver |title=Pyramid selling scam that preys on women to be banned |work=Guardian |date=2001-08-05 |access-date=2013-04-02}}</ref> do exactly this.

Whichever euphemism is used, there are 15 total people in four tiers (1 + 2 + 4 + 8) in the scheme—with the Airplane Game as the example, the person at the top of this tree is the "captain", the two below are "co-pilots", the four below are "crew", and the bottom eight joiners are the "passengers".

[[File:Small Pyramid Schemes Still Lose Money.svg|thumb|At ten levels deep, the "airplane game" has an 87% loss rate.]]

The eight passengers must each pay (or "gift") a sum (e.g., $5,000) to join the scheme. This sum (e.g., $40,000) goes to the captain, who leaves, with everyone remaining moving up one tier. There are now two new captains so the group splits in two with each group requiring eight new passengers. A person who joins the scheme as a passenger will not see a return until they advance through the crew and co-pilot tiers and exit the scheme as a captain. Therefore, the participants in the bottom three tiers of the pyramid lose their money if the scheme collapses.

If a person is using this model as a scam, the confidence trickster would take the majority of the money. They would do this by filling in the first three tiers (with one, two, and four people) with phony names, ensuring they get the first seven payouts, at eight times the buy-in sum, without paying anything themselves. So if the buy-in were $5,000, they would receive $40,000, paid for by the first eight [[Investor|investors]]. They would continue to buy in underneath the real investors, and promote and prolong the scheme for as long as possible to allow them to skim even more from it before it collapses.

Although the "captain" is the person at the top of the tree, having received the payment from the eight paying passengers, once they leave the scheme they are able to re-enter the pyramid as a "passenger" and hopefully recruit enough to reach captain again, thereby earning a second payout.

=== Blessing Loom ===
[[File:Blessing Loom and 8-Ball Pyramid Schemes.svg|thumb|The "Blessing Loom" is identical to the classic "Airplane Game", with a circular diagram obscuring the pyramid structure.]]

Similar to the eight ball model, the '''Blessing Loom''' tricks potential investors by claiming to turn $100 into $800. This scheme has a circular structure, as increases in new recruits pushes individuals closer to the center of the circle, hence the "[[Loom]]" in the name. Each participant needs to recruit two people without providing them with any service or product. The scam often resurfaces online across the globe, under different aliases such as "loom circle" or "fractal mandala".<ref>{{Cite web |author=Okwe Mathias, Abuja |author2=Merlyn Mathews, Lagos |date=21 May 2019 |title=SEC declares 'Loom Money' illegal outfit |url=https://guardian.ng/business-services/sec-declares-loom-money-illegal-outfit/ |access-date=3 May 2022 |website=Guardian Nigeria}}</ref> The Blessing Loom scheme has been ruled as illegal in multiple US cities.<ref>{{cite web|author=ABC News |url=https://www.youtube.com/watch?v=UJm_DYtmo0U | archive-url=https://ghostarchive.org/varchive/youtube/20211104/UJm_DYtmo0U| archive-date=2021-11-04 | url-status=live| title=Police warn of 'blessing loom' scam |website = [[YouTube]]| date=2020-04-20}}{{cbignore}}</ref>

===Franchise fraud===
[[Franchise fraud]] is defined by the United States [[Federal Bureau of Investigation]] as a pyramid scheme. The FBI website states:

<blockquote>Pyramid schemes—also referred to as franchise fraud or chain referral schemes—are marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned, not by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses.<ref>{{cite web|url=https://www.fbi.gov/scams-safety/fraud |title=FBI — Common Fraud Schemes |publisher=Fbi.gov |access-date=2013-04-02}}</ref></blockquote>

=== Matrix schemes ===
{{Main|Matrix scheme}}
Matrix schemes use the same fraudulent, unsustainable system as a pyramid; here, the participants pay to join a waiting list for a desirable product, which only a fraction of them can ever receive. Since matrix schemes follow the same laws of geometric progression as pyramids, they are subsequently as doomed to collapse.

Such schemes operate as a queue, where the person at head of the queue receives an item such as a television, games console, digital camcorder, etc. when a certain number of new people join the end of the queue. For example, ten joiners may be required for the person at the front to receive their item and leave the queue. Each joiner is required to buy an expensive but potentially worthless item, such as an e-book, for their position in the queue. The scheme organizer profits because the income from joiners far exceeds the cost of sending out the item to the person at the front. Organizers can further profit by starting a scheme with a queue with [[shill]] names that must be cleared out before genuine people get to the front. The scheme collapses when no more people are willing to join the queue.

Schemes may not reveal, or may attempt to exaggerate, a prospective joiner's queue position, a condition that essentially means the scheme is a lottery. Some countries have ruled that matrix schemes are illegal on that basis.