A Business Encyclopedia

Pyramid Scheme

Definition: The Pyramid Scheme is a pyramid like a business model that recruits people with a promise of guaranteed high returns through the recruitment of other people into the scheme.

The Pyramid Scheme is an illegal form of investment where people are misled that by giving money they can make more money, but however, no investments, products or services have been sold, and no wealth has been created. Now the question arises that how the pyramid scheme works?

Often, it starts with a single person (initial recruiter) who occupies the top position in the pyramid i.e. at the apex. He will then recruit the second person who invests a certain amount in the scheme which is paid to the initial recruiter. For the new recruit to recoup his investment becomes a recruiter and recruit other persons under him, each of whom shall be required to invest in the scheme. Suppose, the recruiter gets ten new recruits under him; then he can make profits with just a small investment. Likewise, every recruit is required to further recruit members under them and enjoy the higher returns.

This process continues till the pyramid base is strong enough to support the upper structure of the pyramid, and the new recruits can be added at the base. But, however, there are a finite number of people that can join the scheme and hence the cycle cannot sustain itself for a long. The people at the bottom of the pyramid are most vulnerable as it is not possible to recruit more people from whom the initial payments could be recovered. The pyramid scheme is considered as illegal in many countries, and it is assumed that 90% of people joining this scheme loose their money.

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