Last week we wrote about a pyramid scheme called the “kids book exchange” that claimed participants could receive 36 books just for buying 1 book and sending it to a person on top of a list and recruiting 6 other people to do the same.
Basically, if you were recruited by someone, you’d buy a book and send it to the person who recruited the person who recruited you. Then you’d recruit 6 people who’d each send a book to the person who recruited you. Then those 6 people would recruit 6 people each and they would all send books to you! Voila, 36 books! The scheme would continue with each person sending 1 book and recruiting 6 others into the scheme. (A near identical scheme also popped up replacing books with gifts of $10 called the ‘Secret Sister Exchange’)
Yes, it was a classic, run-of-the-mill pyramid scheme. Read here for the full article about it which we recommend doing before continuing.
Our article was well received and got a high number of shares on Facebook, with the vast majority of comments being positive. However we had a few people email or leave comments with certain feedback that we often receive when discussing these types of pyramid schemes. The feedback was nearly always rooted in popular misconceptions about pyramid schemes, so we’ve addressed a few things here…
Here we list phrases we often hear about pyramid schemes.
It’s legal because it’s not cash.
WRONG. Illegal pyramid schemes are not exclusive to cash. Any definition of a pyramid scheme will also include a proviso to include any items of value. Sadly, and frustratingly, there is no evident ‘cut off’ point to when an item is considered to be of no or minimal value (like a recipe or postcard, which are considered legal) and an item of value. However, read the point below…
I know lots of people who do it and they’ve never got into legal trouble.
Yes and you’re probably correct. Small scale pyramid schemes like this seem to work in a similar way to illegally downloading movies from the Internet. And that means that unless you’re operating on a large scale, the chances are high (though not guaranteed) that you won’t get into trouble. Quite simply, the authorities have probably got bigger problems that worrying about a pyramid scheme involving the exchange of children’s books. But that doesn’t mean it’s legal or that you should do it, let alone recruit your friends and family to do it.
But perhaps participants should be more concerned with the ethics of such a scheme as opposed to its legality. It’s a pyramid scheme, meaning that most people will lose out. It’s simple math (See next point). You cannot continually recruit new people to the scheme, meaning when new recruits dry up, the majority of the people on the lower levels will be left without anything. And the pyramid will collapse – and probably sooner than you’d think. Did you know that for a pyramid that requires 6 new recruits per member, by only level 10, the pyramid would require 10,077,696 people to sustain itself.
Yes, over 10 million people.
As long as most of the kids get their books, surely that’s a good thing?
Well, that argument is dubious even if it were true, which it isn’t. To give an example of how many people will actually lose out in these schemes, let’s take an example of a pyramid scheme that – just like our book exchange case – requires 6 new recruits per member, and let’s assume it makes it to 10 levels before collapsing. Again, just like our book exchange case, it’s a two-deep pyramid, meaning you give your book to the person two levels above you in the pyramid, and the (36) people two levels below you will give you their books.
How many people get their books and how many don’t?
We simply add the people on the first 8 levels and compare them to the two lower levels, 9 and 10. To confirm, if the pyramid goes as expected, those on level 1 to 8 will get books, and levels 9 and 10 will not.
Levels 1 to 8 = is 1 + 6 + 36 + 216 + 1296 + 7,776 + 46,656 + 279,936 = 335,923 kids get their books.
Levels 9 and 10 = 1,679,616 + 10,077,696 = 11,757,312 kids do not get their books.
End result, approximately 3% of kids will get books and 97% will not.
Of course this is just an illustrative example and pyramids will not run as simply as this, but you can see how many people will ultimately be on the lower levels of the pyramid when it collapses and lose out. i.e. most.
Well it’s only a book, so it doesn’t matter. I didn’t expect anything back anyway.
Great, but just because a book is an easily affordable item for you, it doesn’t mean someone on a low income will feel the same way. For many people out there, the expense of even something as simple as a book is considered a genuine expense, and needless to say the prospect of getting 36 books in return could be regarded as a fantastic and alluring pay-out. But of course, as we know, despite the claims made in the scheme, the chances of getting 36 books back are slim, and if you’re unlucky enough to be on any of the lower levels (as we know from above that you likely will be)then you won’t get anything in return. For some, that disappointment can be much greater than for others.
Remember, not everyone is in the same situation as you financially.
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I only wanted to give a child a book, what’s wrong with that?
Absolutely nothing. You can give as many children books as you like. Whether it’s your own children, children of friends or family, or even total strangers. There is nothing wrong or illegal with giving someone a book, quite obviously.
However when you recruit 6 people and tell them to follow a set of instructions on the promise of getting 36 books in return, then you’re participating into a pyramid scheme.
The person who started it probably had good intentions.
That may be true. That may be false. But as the saying goes, the road to hell is paved with good intentions.
Just because they had good intentions, it doesn’t make it okay.
I have a right to give people presents or cash, how can that be illegal?
As we stated above, giving cash or items of value to someone else isn’t (necessarily) illegal. However if you’re doing it on the promise of a much larger return in a system that wouldn’t work unless new people had to be continually recruited, then it is likely that is illegal.
Lots of programs call themselves “cash gifting” programs and use various wording in the hope of exploiting legal loopholes. However if you give away cash/items expecting to get a larger return AND it’s part of a system that relies on the continual introduction of new recruits, then it’s a pyramid scheme. There is no way around it.
So basically, yes, you can give people cash presents if you want, but not as part of a scheme that promises larger pay-outs at the expense of whoever loses out at the bottom of a pyramid.
We hope this clears a few things up and illustrates the blatant problem of pyramid schemes. Our recommendation – don’t have anything to do with them. They are legally dubious and morally corrupt.