Question

Explain how the following Pyramid schemes work and why they should be avoided:

 

(a) The chain letter scam

 

(b) The 8-ball model

Answer 1

(a) A chain letter scam is a type of pyramid scheme in which individuals are asked to send a small sum of money to the person at the top of a list, and then add their own name to the bottom of the list. They are then asked to send the letter to a certain number of friends or acquaintances, with the promise that they will receive a large sum of money in return. However, the scheme relies on an ever-expanding number of participants to generate the promised returns, and eventually, the scheme collapses and most participants lose money.

(b) The 8-ball model is a type of pyramid scheme in which participants are asked to pay a fee to join, and then recruit others to do the same. They are promised large returns based on the number of people they recruit, but the scheme eventually collapses when it becomes impossible to recruit enough new participants to sustain the returns promised to earlier participants. Like other pyramid schemes, the 8-ball model is illegal and should be avoided.