Pyramid scheme facts for kids
A pyramid scheme is a tricky way to make money that usually doesn't last long. People are promised money or other good things if they get more people to join. But there are no real products or services being sold to the public. It's a type of trick or scam. Because of this, pyramid schemes are against the law in many countries.
These schemes have been around for over 100 years. They often change how they describe themselves to hide the trick. Some people think that multilevel marketing (MLM) can be similar to a pyramid scheme.
How Pyramid Schemes Work
A pyramid scheme often looks like a real business. It has a simple way of describing how you can make money. The idea is that the first person, let's call them Mr. X, pays to join. To earn money, Mr. X must find other people who will also pay to join. Mr. X gets paid from the money these new people (called recruits) bring in.
These recruits then go on to find even more people. As each new person pays to join, Mr. X gets a part of that money. Mr. X is promised more and more money as the "business" grows.
These "businesses" don't sell real products or services. To make them seem real, many scams use fake letters from "successful" members. They also share false information. Only the very first person, sometimes called the "pharaoh," and a few people at the top of the pyramid make a lot of money. The amounts get much smaller further down the pyramid. Someone at the bottom of the pyramid usually loses money. They paid to join but can't get anyone else to sign up.
The "Eight-Ball" Model Explained
It can be hard to get many people to join a scheme. So, some schemes use a system that seems simpler. This is called the "eight-ball" model. In this model, each person only needs to find two others to join. However, you need to go through more levels before you get paid.
The scheme works like this: one person recruits two others. Those two people each recruit two more. Then those four people each recruit two more. This continues until there are enough people.
The "eight-ball" model has 15 members in total. This scheme has also been called the "Airplane Game." The four levels are named "captain," "co-pilot," "crew," and "passenger." These names show a person's level in the scheme.
These schemes might try to hide that they are pyramids. They might call themselves "gifting circles." They say that money is being "gifted" instead of paid. For example, eight passengers might each "gift" $1,000 to join. This total of $8,000 goes to the captain, who then leaves the scheme.
Everyone remaining moves up one level. There are now two new captains. So, the group splits into two. Each new group then needs eight new passengers. If you join as a passenger, you won't get any money until you become a captain. This means you must move through the crew and co-pilot levels first.
People in the bottom three levels of the pyramid lose their money if the scheme stops. Popular schemes like "Women Empowering Women" have used this model.
See also
In Spanish: Esquema de pirámide para niños
