How to Spot a Pyramid Scheme

Recently, a consumer named Kelly wrote to us to ask about an opportunity that she was pretty sure was a pyramid scheme. The name of this particular scheme was the Ujaama Cooperative Friends and Family share group. The claim was that you could send them just $500 and then receive $3,200 every month. Kelly was right to recognize this offer as a pyramid scheme, but how did she know?

Recognizing a Pyramid Scheme

A pyramid scheme is a pretty simple scam, though it can be dressed up in some pretty complicated ways. Basically, you give the scammer your money to join the scheme, and then you have to recruit more members to the scheme to make any money. As long as members keep recruiting new members, the cash flow continues, and the people at the top continue making money. But because the scheme requires exponential growth to stay afloat, eventually, members run out of new people to recruit. When that happens, the system collapses, and the people on the bottom who paid to join receive nothing in return. Since the number of members has to grow exponentially at each tier of the pyramid, most members will always be at the bottom, so the majority of people will lose their money with nothing in return.

Why People Join Pyramid Schemes

Pyramid schemes rely on human psychology, and many situations and emotions can make people more susceptible to these scams. Here are some common reasons people get involved in these schemes.

• Fear of missing out. People think that this is an excellent opportunity that they will regret missing if they don’t take it.
• People you trust. When an opportunity is presented by a friend, family member, or someone else you trust, it can seem like a better idea than if it was offered by a stranger.
• Getting in on a secret. If it’s hard to find information about the scheme, some people will believe that they have been let in on a great secret. It can make them feel good about themselves that they know something special that other people don’t.
• Desperation. If someone is desperate for money, they may fall prey to a scheme that seems to offer a way out of their financial problems.
• The need for something positive. People going through tough times in their lives are susceptible to pyramid schemes because they are desperate for something positive. When everything seems to be going wrong, a pyramid can look like an opportunity to feel good about something.
• Loneliness. Loneliness can drive people to look for something positive to pull them out or their malaise. This is why some seniors can be especially susceptible to pyramid schemes and other scams.

We’re glad that Kelly recognized the scam that she was presented with. We want all of our friends and consumers to know what signs to look for. Are you making a decision based on one of the above reasons? As always, remember the old adage that if something looks too good to be true, it probably is. There is almost no situation in which someone is just giving out free money. So if someone says they are, be prepared for a scam.