Before we move forward with our discussions on the Albanian Pyramid scheme that caused a civil war, it is useful to refresh our memories concerning the differences between a pyramid scheme and a ponzi scheme. Remember, although they are related, the two are different.
Definition of a pyramid scheme from Wikipedia:
A pyramid scheme is a non-sustainable business model that involves promising participants payment or services, primarily forenrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public. Pyramid schemes are a form of fraud.
Definition of a Ponzi scheme from Wikipedia:
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going.
Differences between a pyramid scheme and a Ponzi scheme:
A pyramid scheme is a form of fraud similar in some ways to a Ponzi scheme, relying as it does on a mistaken belief in a nonexistent financial reality, including the hope of an extremely high rate of return. However, several characteristics distinguish these schemes from Ponzi schemes:
Definition of a pyramid scheme from Wikipedia:
A pyramid scheme is a non-sustainable business model that involves promising participants payment or services, primarily for
Definition of a Ponzi scheme from Wikipedia:
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going.
Differences between a pyramid scheme and a Ponzi scheme:
A pyramid scheme is a form of fraud similar in some ways to a Ponzi scheme, relying as it does on a mistaken belief in a nonexistent financial reality, including the hope of an extremely high rate of return. However, several characteristics distinguish these schemes from Ponzi schemes:
- In a Ponzi scheme, the schemer acts as a "hub" for the victims, interacting with all of them directly. In a pyramid scheme, those who recruit additional participants benefit directly. (In fact, failure to recruit typically means no investment return.)
- A Ponzi scheme claims to rely on some esoteric investment approach and often attracts well-to-do investors; whereas pyramid schemes explicitly claim that new moneywill be the source of payout for the initial investments.
- A pyramid scheme typically collapses much faster because it requires exponential increases in participants to sustain it. By contrast, Ponzi schemes can survive simply by persuading most existing participants to reinvest their money, with a relatively small number of new participants.
Have a great and fraud free day.
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