When I asked people that I know they say it's the same thing. However the internet says there is a difference and it is a complicated difference so I was wondering if anyone can explain in a simple way.
What is the difference between a Ponzi Scheme and a Pyramid Scheme?
- Posted:
- 3+ months ago by Snakerman
- Topics:
- people, pyramid, internet, complicated
Details:
Responses (4)
They are different
A Ponzi scheme is a fraudulent investing scam promising "high rates of return with little risk to investors". So the one on the top tells others to invest in a business (that doesn't actually exist or generates profits) and those next investors tell other investors who also invest and so on and so on. The returns given to earlier investors are paid for by the investments of later investors and so on. A Ponzi scheme is illegal. There is a good video on Investopedia that will make it very clear. :-)
A pyramid scheme is also called a multilevel marketing business (such as Herbalife). Members enrolling to buy the products for cheaper but they need to also recruit other members to the business to get a small cut of their sales. And those new members get then cheaper products and also need to recruit more new members again and so on. The further down the "pyramid" of members you get the fewer chances of making any amounts of money. The only people that make any money on pyramid scheme companies are the ones right at the top (the founders and maybe the next line down still). Since each member needs to recruit more members which at some point will be impossible, those pyramid scheme companies will eventually collapse and disappear.
A Ponzi scheme is where the early investors are paid with money from later investors with little or no profit involved. Social Security is a Ponzi scheme.
A pyramid organization is where people recruit distributors to sell something and collect a portion of their commissions. There are hundreds of honest businesses using this plan. Amway is the most famous, but there is also Mary Kay cosmetics, Tupperware, and others.
Pyramid = Members are motivated to recruit more people by potential profit (eg they move up the tiers, and higher tiers gain more).
Ponzi = Members are unaware of (or unconcerned with) the expansion. Top entity handles it and pays (equal, partial) dividends / interest to existing members, alongside a bigger cut for itself. The model has an unsustainable, pyramid like structure due to the increasing number of payouts.
They are essentially the same thing. A ponzi scheme uses new investors to pay the old ones dividends. When there are no new investors the scheme collapses. Tesla builds cars on a ponzi styled scheme. They sell new models and use the money to build the old models. That is why they wait so long for delivery.
A pyramid scheme pays those at the top by getting others to join. The higher you are on the pyramid the more you receive. Eventually both fail when new membership stops
PS- DÅTerra is very popular at the moment- that is also a pyramid scheme MLM company.