What Is a Pyramid Scam?

A pyramid scheme is a form of confidence game, whereby a criminal builds upon the good word of early dupes to take money from an increasingly large number of victims. Pyramid schemes can be extremely complex and fool many of the smartest and wisest businessmen in the world. Here's a basic overview of how the scam works.

Beginnings

The confidence man approaches the first victim with an offer to double his money (say, $100) in a short period of time. The victim agrees and hands over the $100.

Expansion

The confidence man goes to two other victims and makes the same offer. They agree, and he now has $200 with which to pay the first victim.

Success

The confidence man then goes to four new victims with the same offer--bolstered by praise from the first victim, who believes that the system works. Those four victims give the con artist $400, which he uses to pay off the two victims in the previous step.

Instability

This process continues upwards for as long as the con man can sustain it. It's called a "pyramid scheme" because it forms a reverse pyramid, starting with the first victim and expanding upwards.

Collapse

The basic formula provides myriad opportunities for the con artist to skim money off the top. It behooves him to take the money and run before the people catch on and the whole scheme collapses; ironically, few do.