Pyramid schemes are nothing new. So why is it then that through the years these much-publicised pyramid schemes, which should serve as lessons, haven’t discouraged the public from falling victim to such schemes time and again? The actions undertaken by authorities involve providing warnings to the public informing them of the investment schemes that were not licensed by the FSCA (formerly known as the FSB), launching a public education campaign and encouraging people to ‘think and check before you invest.’ In spite of these efforts, the popularity of pyramid schemes continues to increase.
The WhatsApp ‘gifting program’ is the most recent creation
This extravagant scheme is well-calculated. On the first investment, many actually receive the “gifts” (other people’s money) they were promised. But we all know how the story goes… It was only after they fell hook, line, and sinker that the dream of getting rich quickly began to crumble for many, as it became obvious the gifting program wouldn’t be returning their money any time soon.
So if all pyramid schemes eventually collapse, why would anyone put money in them?
To answer this question we must understand the personalities of the participants in these schemes. There are three basic categories of people who invest in pyramid schemes:
- Those who participate out of greed knowing the risks;
- Those who are misled into thinking that they are joining an “investment club” or a “gift program”;
- And those who believe that the products or services are legitimate.
But what interests me are the individuals who participate in pyramid schemes knowing that the scheme will eventually collapse. They nevertheless participate, hoping that the scheme will last long enough for them to make a quick profit. I have to confess, I do have these militants in my family as well, who proudly say “I know it’s a scam, who doesn’t know that. I just want to make some quick money and get out.”
These individuals like some of my militant relatives seem to have read all the literature and warnings around pyramid schemes but don’t seem to care about the consequences. A million warnings later no one has succeeded with this group. The pyramid scheme ecosystem needs those who participate out of greed knowing the risks that exist. They are the oxygen to the system. Their bold actions attract a lot of investors who wouldn’t otherwise put money in such schemes. Greed has a strong biological basis. However, it has an even stronger social basis. This sets it somewhat apart from self-preservation and reproduction. It is clear that irrespective of financial education or regulatory strength there will always be a demand for pyramid schemes that are too good to be true.
Head of Investments
Sphelele joined Inkunzi Wealth Group in 2013 and has 9 years’ experience in the investment management industry, having had previously worked for Allan Gray and Regarding Capital Management. Apart from being an active member of our investment team, Sphelele is also responsible for the management of our business. He holds a BCom degree in Economics from the University of Pretoria.