Pyramid scheme

A pyramid scheme, also known as a pyramid scam, is a fraudulent business model where participants make money mainly by bringing in new members, not by selling products or services to customers or through legitimate investments. These schemes rely on a constantly growing number of recruits, which makes them inherently unsustainable. Because recruitment eventually fails to keep the scheme going, most participants—especially those who join late—lose money, while only a handful of people at the top profit. As a result, pyramid schemes are considered fraud and are illegal in many countries.

Pyramid schemes have existed in various forms since at least the mid-to-late 1800s. While some multi-level marketing (MLM) companies have been found to operate as pyramid schemes, legitimate MLMs are different because their compensation is based mainly on retail sales to end consumers, not on recruitment.

**Concept and basic models**

In a pyramid scheme, an organization requires new members to pay a fee. In return, the organization promises them a cut of the money taken from every additional person they recruit. The scheme’s directors (those at the top) also receive a share of these payments. For the directors, the scheme can be very profitable—whether they do any work or not—because members have a strong incentive to keep recruiting and sending money upward.

These organizations rarely involve selling valuable products or services. Without creating any goods or services, the only way to generate revenue is by recruiting more members or asking current members for more money. The behavior of pyramid schemes closely follows the mathematics of exponential growth. Each level of the pyramid is much larger than the one before it. For a pyramid scheme to make money for everyone who joins, it would have to expand forever. When it inevitably runs out of new recruits and has no other income, it collapses. Because the largest numbers in this geometric sequence are at the end, most people end up in the lower levels, which contain the most members. People working for pyramid schemes often promote the company itself rather than any product. Eventually, everyone at the lower levels makes no money; only those at the top profit. When the scheme collapses, members in the bottom layers never had a chance to profit, but they have already paid to join. So a pyramid scheme is characterized by a few people (including its creators) making large amounts of money, while later members lose theirs. This is why they are considered scams.

**The "eight ball" model**

Many pyramids are more complex than the simple model. They recognize that recruiting a large number of people can be difficult, so they use a seemingly simpler model. In this model, each person must recruit two others, but the ease of doing this is offset because the depth needed to recoup any money also increases. The scheme requires a person to recruit two others, who each must recruit two others, and so on.

Earlier versions of this scheme have been called the "Airplane Game," with four tiers labeled "captain," "co-pilot," "crew," and "passenger" to indicate a person's level. Another version was called the "Original Dinner Party," with tiers named "dessert," "main course," "side salad," and "appetizer." A person on the "dessert" course is at the top of the tree. Another variant, "Treasure Traders," used gemology terms like "polishers" and "stone cutters." One version called the Abundance Fractal uses the four elements as tier names: "Fire," "Air," "Earth," and "Water." A more recent variation called the Living Workshop uses plant names: "seed," "sapling," "blossom," and "lotus."

Such schemes may try to downplay their pyramid nature by calling themselves "gifting circles," with money described as "gifted." Others focus on sharing circles or educational themes around "abundance" to distract from the unsustainable structure. Popular schemes like "Women Empowering Women" do exactly this.

Whatever euphemism is used, there are 15 total people in four tiers (1 + 2 + 4 + 8) in the scheme—using the Airplane Game as an example, the person at the top is the "captain," the two below are "co-pilots," the four below are "crew," and the bottom eight joiners are the "passengers." The eight passengers must each pay (or "gift") a sum (e.g., $5,000) to join. This total (e.g., $40,000) goes to the captain, who then leaves, with everyone else 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 as a passenger will not see a return until they advance through the crew and co-pilot tiers and exit as a captain. Therefore, participants in the bottom three tiers lose their money if the scheme collapses.