Ep. 4 - So, What's a Pyramid Scheme?
Ever had a person try to recruit you into a multi-level marketing (aka MLM) company? One of the first things they say is, "It's not a pyramid scheme." What is a pyramid scheme? Are MLM companies legal pyramid schemes? What does that mean?
Listen to full episode :
Lesson Ideas:
This episode’s lesson is really about misconceptions people have about pyramid schemes and how it is disguised as a legit “business opportunity.” So, if you did the Grain of Rice activity or discussed the pyramid image, now you can revisit them after listening to Robert’s lesson with the new lens of MLM being a pyramid scheme and understanding why so many get fooled. If you didn’t do the two activities, here they are again.
Scenario:
Read the Indian fable, A Grain of Rice, and have students fill out the Excel spreadsheet provided with this link or do it together as a class: Grain of Rice
Image for Notice and Wonder discussion:
One option is to use the image below by itself to spark discussion before Robert’s lecture. Another option is to share this image after the students read the fable Grain of Rice. You could also choose to cover the words on the image until after the discussion or even until after Robert’s lecture. Students can guess what is covered.
This image could also be used instead as an exit slip at the end of class. Students could notice and wonder in writing and cite some of Robert’s points from the lecture or explain how the image relates to his lecture. It may help to provide students with the transcript of the episode.
You could choose to simplify the exit ticket to the student writing a Question, Quote (from Robert’s lecture), or Comment about the image below.
Note taking during Robert’s lecture:
Below are links regarding sketch notes and one pagers from the Now Spark Creativity website by Betsy Potash.
Discussion Ideas for after Robert’s lesson:
You could display the image above and have a whole class discussion, or provide groups with the image to discuss. This lesson specifically links the MLM structure to pyramid schemes. Having students list the misconceptions and discuss them further might be valuable.
Here are two discussion structures from The Cult of Pedagogy Podcast/ Episode 28 to use when students discuss the image and/or Robert’s lecture. I chose these two since they are relatively low prep and they set up primarily the students to share their opinions and do the talking and thinking.
Socratic Seminar/Socratic Circle - In this case, the texts could be the transcript from Episode 4. Follow the link for more about this structure that is very common in middle school, high school, and college classrooms.
Philosophical Chairs - There are many variations to this discussion structure. Podcaster Jennifer Gonzalez calls the following version of Philosophical Chairs This or That. The teacher can ask the class a question related to Robert’s lesson that can be agreed with or not agreed with and then students move to the part of the room that matches their opinion about that question. There can be a “hot seat” set up in each spot for students one at a time to share their evidence, opinions, etc. You could have an Agree and a Disagree area in the classroom or, as Jennifer Gonzalez shares in her podcast episode, a continuum from Strongly Agree to Strongly Disagree.
Links for Robert and Melissa:
Robert’s book: Ponzinomics
Robert’s Website: Pyramid Scheme Alert
Melissa’s Podcast: The Teacher As...Podcast
Transcript:
Melissa Milner 0:15
Welcome to Ponzinomics 101. I'm Melissa Milner. I'm a 30 year veteran teacher and host of The Teacher As... podcast.
Robert FitzPatrick 0:22
And I'm Robert Fitzpatrick, author of the book Ponzinomics: The Untold Story of Multi-Level Marketing.
Melissa Milner 0:30
We are cohosting Ponzinomics 101, a monthly educational podcast for anyone who would like to learn more about multi-level marketing, and why it should be avoided.
Robert FitzPatrick 0:40
We hope this podcast will be a resource for teachers and parents and provide valuable information that is not currently being taught in our public schools, colleges and universities.
Melissa Milner 0:55
If you are a teacher who has created lessons about MLMs, and you're willing to share your work with other teachers, please go to our website, ponzinomics101.com to contact us. If we get enough lessons from teachers, we may start a Teacher Resources tab on our site to share the great work we're all doing.
Robert FitzPatrick 1:13
The best defense is awareness. Be informed think, question everything, and keep your mind engaged.
Melissa Milner 1:22
In the last three lessons, we examined the realities of direct selling. We looked at seven requirements for person to person selling to be feasible and profitable in today's world of internet and big store selling. We tested multi-level marketing against the seven requirements. It failed all of them. After concluding that MLM could not be direct selling, Robert taught about what MLM actually is. In this lesson, Robert goes into more detail about how all MLM enterprises are pyramid schemes. Before this lesson, it would be a good idea to have students share if they have ever heard of pyramid schemes and what they think they are. The content in lesson three hopefully gave students enough background to make some educated guesses about what a pyramid scheme is, especially if teachers share a visual of a pyramid scheme. Similar to the one we shared on the episode three page of ponzinomics101.com Students could do a quick write of their thoughts and then share whole class or in small groups. If there are misconceptions, they can be discussed and debated in the moment, or that can wait until after listening to the lesson. Make sure to check out the episode four page on ponzinomics101.com for more teaching ideas for this lesson, including discussion ideas.
Robert FitzPatrick 2:43
In lesson three, setting aside all preconceived ideas of what MLM is, or what we've been told it is, we examine the four basic essential characteristics common to all multi-level marketing enterprises. They are endless chain, that is expands level by level for ever. Pay to play, you pay fees to join the chain, and you must meet quota purchases in order to gain the promised unlimited rewards from new levels. Recruiting mandate, the promised rewards come from other people's work and purchases. It's up to each new recruit to bring in more recruits. Extreme money transfer, the reward plan sends most reward money directly to the top on each transaction. Most of the money flows from bottom where most members of the chain are positioned directly to a tiny few at the very top.
Robert FitzPatrick 3:55
These are the very same basic characteristics of a pyramid scheme. Here's the definition of a pyramid scheme from the New York Attorney General's Office which describes these characteristics and I quote, "A pyramid scheme is a fraudulent system of making money based on recruiting an ever increasing number of "investors." The initial promoters recruit investors who in turn recruit more investors and so on. The scheme is called a pyramid because at each level, the number of investors increases. The small group of initial promoters at the top require a large base of later investors to support the scheme by providing profits to the earlier investors. And here's the definition in the dictionary of Encyclopedia Britannica, quote, "A dishonest and usually illegal business, in which many people are persuaded to invest their money and the money of later investors is used to pay the people who invested first.
Robert FitzPatrick 5:11
This all sounds simple, straightforward, even obvious. You pay to join a chain that keeps expanding without regard to market saturation or the laws of math. The participants on the chain do the recruiting, the money from the new recruits is transferred to earlier ones. As we know, no chain can expand forever. But as long as it does operate, the majority on the chain are at the bottom, so nearly all the people will always lose. Pyramid schemes are called unsustainable, since they cannot keep expanding, deceptive, since the losses to most people are denied or concealed and harmful, since nearly all will lose by design. So how is it possible that millions upon millions of people join pyramid schemes every year? Can't they see the obvious design flaw, the trickery and terrible consequences? Well, they probably would, except for one thing. In the history of the world, there is no record of anyone ever operating or joining a pyramid scheme that was called a pyramid scheme. Pyramid schemes are always disguised and go by many different made up names and fake identities. They can masquerade as direct selling, discount buying club, social club, educational program, a gain, a religious program, a mission or a financial investment group, among others.
Robert FitzPatrick 6:57
So, to recognize the pyramid scheme, you have to look at basic characteristics, not what it calls itself, and not the superficial disguise, whose purpose is to deceive you. When you know what to look for, the disguise appears silly and ineffective. If you don't know what to look for, the disguise may appear as a legitimate business, dazzling, enticing, beautiful, intelligent, just what you've been looking for all your life. In this lesson, we will examine the four MLM characteristics measured against the defining characteristics of pyramid schemes.
Robert FitzPatrick 7:42
Attention please. There was one requirement for lesson number three, it was to maintain an open unqualified inquiry of what MLM is, that meant setting aside any earlier beliefs or impressions or what MLM recruiters have said, it meant examining MLM, as if you did not know what it is. The same requirement to set aside what you think you know, is needed again, when looking at pyramid schemes in relation to MLM. Why? Because the first disguise of pyramid schemes, and remember all pyramid schemes are disguised, is to camouflage or confuse the very meaning of a pyramid scheme. If your understanding or impression of a pyramid scheme, any pyramid scheme, is mistaken or inaccurate, you are not likely to spot a pyramid scheme when you are solicited to join one. You will have been "redirected" to look away from the basics and to focus instead on the glossy and distracting elements of disguise. With MLM most people know they must pay to join and buy goods monthly. They figure out that they have to recruit to gain the promised rewards. They realize very quickly that only a few at the top get most of the money, yet they don't recognize these characteristics as the hallmarks of a pyramid scheme. Why? Because they already had inaccurate or erroneous impressions of what a pyramid scheme is. Those erroneous impressions prevented them from seeing what was right in front of their eyes.
Robert FitzPatrick 9:37
Here are some false impressions many people hold about pyramid schemes. One, pyramid schemes are illegal. And so any enterprise that is licensed and is operating openly could not be a pyramid scheme. If it were, it would be prosecuted and shut down. So no matter what else the scheme does and even if almost everyone is losing money, most people will not even imagine the losses are due to a pyramid scheme.
Robert FitzPatrick 10:09
Two, good people do not run pyramid schemes which are illegal, and people like me do not join illegal enterprises. So if the people behind the pyramid scheme appear wholesome and law abiding, or happy and prosperous, and the people inviting me to join are people like me, even friends or family, the enterprise could not possibly be a pyramid scheme.
Robert FitzPatrick 10:38
Three, pyramid schemes don't sell products, they just charge people to join, and the money that is transferred is from joining fees. If people buy products, the enterprise can't be a pyramid scheme. Even if a lot of other features appear like a pyramid, endless expansion, pay to join, recruiting, money goes to the top.
Robert FitzPatrick 11:03
And four, pyramid schemes collapse quickly when they "run out of new recruits." Pyramids require constant expansion which cannot continue. So they flare up and then fall apart very quickly. Therefore, any enterprise that has been operating for years or decades cannot possibly be pyramid scheme. If the enterprise is still going, no matter what else is known about it that resembles a pyramid scheme, it cannot be a pyramid scheme.
Robert FitzPatrick 11:37
Where did people get these erroneous ideas about pyramid schemes? From enterprises that run pyramid schemes. This is part of the overall disguise and redirection that cause people to fail to recognize pyramid schemes when they encounter one personally. None of those misconceptions actually are about basic characteristics of a pyramid scheme. Each is intended to prevent people from seeing through the disguise. So let's go back to the four basic characteristics, the first being endless chain. As we know, an endless chain is impossible. If each person recruits five and the chain extends and expands, in less than 15 recruiting cycles, the earth's population is surpassed. As the number of participants increases, the number of potential recruits must decrease towards saturation. Also, the majority of all the people in such a chain are always at the bottom. So as long as it operates, the vast majority cannot make money. The plan dooms the majority to lose, but nothing about the endless chain says it has to collapse. Collapse or rapid collapse is not a basic characteristic. If the losers at the bottom quit after losing money and are replaced, and if they recruited some others before quitting, the scheme could go on for many, many years. If those who quit after losing money are led to think they "failed" for lack of effort, they are not likely to protest or even warn others. So the scheme can keep recruiting. The scheme can churn 1000s of people in and out, year by year, millions lose, but the scheme itself is still operating. It does not collapse. Those at the top keep getting the money from all the losers. Also, the scheme can expand to more countries, where even more people can be recruited. So just because an enterprise is around a long time indicates nothing at all. If you use the "still in business over time" argument, to say a company is not a pyramid scheme, you have been redirected. All you need to know is that if it is based on endless expansion, and promised income is based on unlimited growth, that is the bright red flag of a pyramid scheme.
Robert FitzPatrick 14:31
Second, pay to play. If you are putting in your own money to gain a position on a quote chain or a network, ou are quote playing in the endless chain. You can pay with cash. You can pay by buying a product, you can pay by paying a tuition. Your payments can include you selling some products. If the payment is required for you to get money from those you recruit, and they would do the same, it does not matter how you pay. It does not matter whether products are involved or not. In fact, every multi-level marketing enterprise that has ever been prosecuted in the USA, or in other countries, sold products. The people in the schemes bought and sold products, they had to buy and sell some, just enough to join, and then monthly to remain on the endless chain. While on the chain, they were told they could gain unlimited money from the others who are recruited and who paid. All you need to know is that if the enterprise requires you to pay a fee, or make a purchase, or a payment of any kind, in order to qualify for the rewards that come from the endless chain, that's a bright red flag of a pyramid scheme.
Robert FitzPatrick 16:03
Three, recruiting mandate, this basic characteristic would seem obvious, but it too can be disguised. Recruiting people that you will make money off of, and telling them everyone can make a profit from recruiting forever, even though nearly all never make any money can be disguised as "building a team", "making referrals", "networking" and "sharing an opportunity." If you are selling a product, why would you recruit others to also sell the product? Wouldn't they be your competitors? How many direct sellers can be in any area? There has to be some limit. If everyone is selling, who's buying? Recruiting is not selling, even if the recruit buys a product. Recruiting is "duplicating yourself", and has nothing to do with direct selling. As we have already explored. direct sellers do not recruit other direct sellers. They just sell products to real customers based on customer needs, desires, price, quality, and so on. All you need to know is that if you have to recruit other people onto the endless chain, in order to get the promised rewards, that's a bright red flag of a pyramid scheme.
Robert FitzPatrick 17:33
Four, extreme money transfer. In a pyramid scheme, money is transferred from later participants to earlier ones, with most going to those at the very top. Virtually no one makes any money except those at the top. Data on MLMs show that 99% always lose. Most money on every transaction, that would be fees and purchases, goes to the top 1%. So why don't people instantly recognize that any so called opportunity that has this plan is a pyramid scheme. Because just like the endless chain, pay to play and recruiting mandate, the extreme money transfer is disguised. It's called a compensation plan. The plan has levels, ranks, points, requirements, quotas, lines of sponsorship and percentages based on volume and rank. It is impossible to understand; that's the first redirection. People are led to think that it's a real pay plan that is so sophisticated, they just can't understand it. They are told just to trust the system and believe the leaders. But if you focus on the basic characteristic of the money transfer, then the unfairness and the deception of the plan are obvious. But if you accept the scheme's disguise, that calls the plan a method of "payment", it appears like it was "earned." Since it is based on volumes of purchases of products, it will also appear to be based on "sales," but it is not based on personal sales, that is on direct selling. What a person gains from the scheme is totally based on recruiting. Those with the most recruits get nearly all the money. This is a tiny few and can only be a tiny few. The money they get is not earned. It is transferred. It is not based on sales, but on recruiting. The recruiting is not legitimate because all the recruits are told everyone can recruit as many as the top recruiters have. This is physically, mathematically, financially impossible. In fact, 99% always lose. The plan is rigged to reward the top recruiters and the scheme's owners, at the expense of everyone else. If everyone who joins is told they too can receive the, "income" of the people at the top, they are being lied to. If they are told the money is based on selling, when actually no one makes a profit from their own sales, they are being lied to. All you need to know is that if the only people making the promised rewards are the few at the top of the recruiting chain, and their money came from the work of their chain of recruits, not from their own personal sales, that's a bright red flag of a pyramid scheme.
Robert FitzPatrick 21:03
When you focus only on the basic characteristics, not the fake names, the distracting products, the pseudo business terms, and the unfounded promises of wealth and happiness, the scheme will emerge right in front of your eyes as an obvious fraud, a trap and a scam. Then you'll wonder why doesn't everyone else see it's a pyramid scheme.
Melissa Milner 21:31
Before we close this lesson, there was one false impression that we asked you to set aside in order to focus only on the basic characteristics of MLMs measured against those of pyramid schemes. It is that pyramid schemes are illegal and so any enterprise that is licensed and is operating openly could not be a pyramid scheme; if it were it would be prosecuted and shut down. And from that erroneous impression, many people also hold that, good people do not run pyramid schemes, which are illegal, and people like me do not join illegal enterprises. So if the people behind the pyramid scheme appear wholesome, and law abiding, are happy or prosperous, and the people inviting me to join are like me, even friends or family, the enterprise could not possibly be a pyramid scheme. These two related false impressions will be taken up in the next lessons. As we shall soon see, though both impressions seem reasonable and sound, neither is true at all. We will see why. More teaching ideas for this lesson are available on ponzinomics101.com on the episode four page. Please remember to check us out on Twitter, Facebook and Instagram at ponzinomic101 and check out our website. www.ponzinomics101.com We hope you spread the word about this podcast because the best defense is awareness. Thanks for listening.