The psychology of pyramid schemes: How the scammers get their way

The nationwide phone fraud affecting university students nationwide made it to the front page in last week’s issue of The Gryphon. Students were promised a £50 reward and a monthly income in exchange for taking out mobile phone contracts in their name. Those phones were sent on to unknown companies but left students in debt when these companies decided to cancel the contracts without the student’s consent. It is, however, possible to protect yourself from what we call a ‘pyramid scheme’.

The pyramid scheme is a multi-layered business model that is unsustainable in the long term. In order for you to earn money, you will either invest into a scheme expecting a profit or buy a specified product that is likely to be overpriced and of little value.

Technically, victims of the scheme don’t ‘earn’ money, but receive incentives for recruiting new investors or sell products on to their friends and family. The new recruitees will have to go through the same process in order to make money for themselves. Each round of recruitees make up a new level in the pyramid which widens at each level. The money that the people from the lower levels invest, will move upwards to the people at the top. When there are no new recruitments, the pyramid scheme collapses and the people in the lower levels lose all of their money and will not be able to get anything back.

Scammers and fraudsters are highly skilled communicators. They use specific tactics to convince others to part with their money. The American psychologist Robert B. Cialdini has identified six important elements of persuasion.

Reciprocity: Humans feel obliged to return favours. If your friend invited you to her birthday party, you are likely to invite her to yours. Some fraudsters hold a seminar to attract new ‘investors’ or to sell products. For example, they may offer free food and drinks at the seminar. Even though it isn’t strictly a favour, we nevertheless feel obliged to agree to buy their product or invest our money.

Scarcity: Humans want to have ‘more’ of what they have ‘less’ of. In pyramid schemes it is all about value for money and unique products that only we, the consumer, can have. A scarce item could be a product that is advertised as ‘exclusive’ by the fraudsters, or the promise that the return on an investment is higher than the initial money put in.

Authority: Humans tend to trust experts. During seminars at which new victims are lured into the pyramid scheme, the fraudsters portray themselves as credible and knowledgeable. This can easily be done by providing fake credentials or having another person introduce us to the ‘expert’. Likewise, first-hand accounts of personal experiences is another powerful tool to make others believe they are sitting in front of an expert.

Consistency and commitment: Once we agree on a goal or an idea, be it written or spoken, it becomes part of our self-image. We tend to respect our self-image and make future commitments that are in line with it. This technique is even more powerful if the commitment was voluntary and active. In seminars, that could be as simple as making the participants repeat the same sentences over and over again.

Liking: People are more likely to agree on something if they like the other person. The likeability is influenced by how similar their personalities are, by receiving genuine compliments from the other person and by working towards a common goal.

Consensus: We frequently compare our actions to those people around us, especially when we are insecure. Scam artists use this insecurity to pick on their victims. They will tell you about countless other people who have invested or bought the product and that they’ve made money.  This leaves people not wanting to feel left out as the general consesus is one of participation.

In the UK, pyramid schemes are illegal. It is therefore important to recognise the signs of the scheme to protect yourself. If you have been approached about a multi-level investment scheme that carries little to no risk and sounds too good to be true, then it probably is. Furthermore, if you are asked to pay a joining fee or an investment and to recruit your friends, family or neighbours, those are red flags to look out for.

However, the pyramid scheme is only one of many fraudulent operations.

There are things you can do if you become a victim of the pyramid scheme. You can make a report to ActionFraud. For more information on how to report the fraud go to Aside from the report, make sure to inform your bank if you have given away your bank details. Always keep written communication between you and the fraudsters as it could serve as evidence.

Be aware that once you have been a fraud victim you are more likely to be targeted again. Fraudsters share your personal information with other scam artists and may approach you for a similar scheme. They may also use this information to find you and claim to be a lawyer or a police officer and help you get your money back.

Pyramid schemes are on the rise. Students are easy victims because they have limited funds available and want to make supposedly easy money on the side. If you are careful and watch out for the warning signs you can reduce the likelihood of becoming a fraud victim. Pyramid schemes are only one way fraudsters take your money. Anything that sounds to be too good to be true usually is.

Michelle Heinrich

Feature Image: LearnVest

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