A Byte of my 2.2-lb Brain

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Of Multilevel Markets, Pyramid Schemes, and Ponzi Scams

Remember, as the cliché goes, “if it sounds too good to be true, then it probably is,” especially when it comes to money and business.

I would like to share with you the article I contributed to the Philippine Star that was published early today. With the alarming news that we have been reading about people getting swindled off by fraudsters through Pyramid scams, I believe that sharing our previous work on multilevel markets and their growth dynamics is very timely. The article is titled Thinking through pyramid-like business schemes.

An excerpt:

One of the key results we found was that MLM membership growth “decelerates after reaching a size threshold, contrary to claims of unrestricted growth.” The network does not grow continuously and exponentially, but slumps down after some threshold level. This resulting growth dynamics was also observed in the data that we collected from an actual MLM company. One plausible explanation behind this phenomenon can be attributed to the “small-world” property of our social network. As mentioned above, social networks are “highly clustered,” i.e. your friends are most likely to be friends with each other, too. How is this relevant in MLM operations? To illustrate, imagine having five friends who are also friends with each other. Once you recruit all five of them, they all would have no one else to recruit, at least none within your circle or clique; or they would have five (including yourself) less people whom they can actually recruit. Into the bargain, in small cities, communities and/or barangays, this clustering is especially expected to be higher, and the “world” becomes much “smaller”; that is, everyone seems to already know everyone else. What this fundamentally tells us is that people will eventually run out of friends, relatives, and/or acquaintances to recruit more quickly.

Given this premise, it has to be understood that if certain networking schemes depend solely on network membership growth (recruitment process) as means to make money, they are inevitably bound to collapse; that is, you will run out of “friends” and “acquaintances” to recruit. Regrettably, people situated at the lower levels of these networks are the ones who are most affected. In fact, in our work, we also showed that the “earning potential of (certain MLM architectures obeys) the Pareto “80–20” rule, implying an earning opportunity that is strongly biased against the most recent members.” This basically says that 80 percent of the wealth of certain MLM companies is owned by only a measly 20 percent of its total members — the top 20 members.

xo

One comment on “Of Multilevel Markets, Pyramid Schemes, and Ponzi Scams

  1. Pingback: Of Multilevel Markets, Pyramid Schemes, and Ponzi Scams | A … | The Home Working Blog

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This entry was posted on February 7, 2013 by in Philippines and tagged , , , , , .
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