Almost certain loss: the psychology of pyramid schemes

Abstract

This thesis investigates investing in pyramid schemes. Study 1 explored the relationships between people s perceptions of investment options and their investment decisions. These options included a bank, a pyramid scheme, stock market and a safe. In this study, participants imagined they could invest money in any of the options and rated their perceptions of each option on various scales. When investing money, participants invested larger amounts in the options that they rated more positively. Compared to other investors, pyramid investors had higher positive correlations between their ratings of the pyramid scheme and how much money they invested. In Study 2 participants indicated how much money they would invest in each option and how risky they perceived the investment. As the perceived risk of an investment option increased, people invested less money. However, participants did not identify the pyramid scheme as the most risky option and rated it as being no more or less risky than the stock market. In both Studies 1 and 2 about half of the participants were willing to invest in the pyramid scheme. In Studies 3 and 4, participants imagined they had invested money in a pyramid scheme and were recruiting new target investors. Two experimental conditions were devised. In the first condition, participants were not informed of the potential for monetary loss, whereas in the second condition, monetary loss was made explicit. Potential target investors varied in the closeness of their rated relationship to the participant. When in the early non-loss condition, participants selected targets that were close to themselves, but in the loss condition they favoured targets that were less close. Furthermore, when in the non-loss condition, participants persuaded those targets they were closer to invest, whereas in the loss condition they persuaded them not to invest. Studies 5 and 6 found that there was no difference in sensation seeking propensities or intellect between pyramid scheme investors and non-investors. One clear finding for the research is that many people did not select the pyramid scheme as the poor investment that it is, a result which indicates its present illegal status is justified.