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Pyramid Power, or Pennies for a Pony

• July 12, 2010 • 5:00 AM

Whether chain letters or Bernie Madoff, scams that rely on ever-greater numbers of gullible people eventually founder.

When I was a kid, I read somewhere that if I put a penny in my piggy bank on day one and doubled it each day, by the end of the month I’d be a millionaire.

Wonderful, I thought. I only needed to take 127 pennies from my weekly allowance in the first week; not too bad a burden when there were only three more weeks to go before I could afford a pony for my sister’s birthday! Of course, with some better math skills and skeptical thinking, it dawned on me that on day 26 I would have to put over $335,000 in the bank to reach a million the very next day, a little more than I would collect in tips on my newspaper route.

This was also my introduction to the ancient pyramids of Ponzi.

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Skeptic's Cafe

SKEPTIC'S CAFE
Peter Nardi discusses how to use our critical skills to avoid scams, respond to rumors and debunk questionable research.

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Thanks to Bernie Madoff, who was sentenced to prison just over a year ago, we’ve all heard about the Ponzi pyramid scheme that depended on new investors paying the earnings for earlier investors’ supposedly surefire moneymaking ventures.

Named after the Italian immigrant Charles Ponzi, who bilked millions from people buying his international postal coupons that he sold from his Boston office in the 1920s, these swindles depended on the trust and avarice of many, increasing at an exponential rate similar to my piggy bank scheme. Although attributed to Ponzi, this investment strategy can be traced to William F. Miller, a Brooklyn bookkeeper and Bible studies teacher, who in 1899 promised investors a return of 10 percent a week, or 520 percent a year. But Miller himself was swindled and then caught when he couldn’t make the promised payments to his clients.

Lest you think these schemes existed only for the past century or so, consider the phrase “to rob Peter to pay Paul.” This idiom refers to taking money from one person to pay a debt owed to another. The Oxford English Dictionary traces the phrase to John Wycliffe’s Select English Works of 1380, in which the theologian writes, “Lord, how should God approve that you rob Peter and give this robbery to Paul in the name of Christ?” The concept of swindling money from some people to pay off the debts and supposed investment earnings of others probably existed even earlier, perhaps to the era of the first pyramids.

And lest you think that you are not one to fall for such financial schemes, consider the e-mail chain letters that fill many inboxes: Send this on to 10 good friends and wait for good luck to happen; failure to pass it along can only bring sorrow and bad karma. Or so we are led to believe. These harmless messages do create lots of spam and annoy your friends and colleagues, perhaps creating bad karma for those who forward them.

But how often do you feel a wee bit on alert when you choose not to send these chain e-mails on to others? Just maybe something might happen; after all, testimonials from allegedly real people who’ve had bad luck after they failed to pass along the chain letter are provided.

So let’s put on the critical thinking hats and detect what’s happening in these schemes. First of all, chain letters that require sending money or something of value are against federal postal law.

E-mail versions, which emphasize bringing luck or blessings from the Lord, are not illegal, but have similar characteristics. Invariably, the stories urge you to act quickly. They provide minimal details and vague generalizations about the good fortune of those diligent folks who forwarded the e-mail to friends and about the harm that came to those who didn’t. Sally sent out the e-mails to her friends and within days she met a boyfriend and they eventually married; Roberto ignored his e-mail request to forward it and several weeks later, while crossing the street, he was hit by an out-of-control semi. Dates and locations are never specified, and the statutes of limitations for how long the curse or luck last are never specified. Correlation here always implies causation.

Financial pyramid schemes consistently build on the idea of something for nothing: huge returns in a short time period for doing virtually no work. Often a secret plan or international connection is invoked, and evidence of the underlying product or investment is difficult to find.

Given the ultimately exponential number of people needed to pay off the earlier investors, pyramid plans run out of people, usually exceeding the population of the U.S. (or Albania) within a dozen levels.

You should also investigate multilevel marketing plans that involve paying you commissions for selling a product and for recruiting new distributors of the product. Some of these programs require that you buy starter kits of literature and inventory while promising you quick fortunes for selling their magical diet elixirs. For legitimate multilevel marketing companies, be sure to research their plans’ details, their track records and the legitimacy of the claims made about their products. Perhaps then you’ll have a piggy bank with more than just pennies and legitimately get to buy your pony.

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Peter M. Nardi
Peter M. Nardi, Ph.D, is an emeritus professor of sociology at Pitzer College, a member of the Claremont Colleges. He is the author of "Doing Survey Research: A Guide to Quantitative Methods.”

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