that more will join afterwards, driving up the value of their investment.
[21] This can lead to what is known as the ‘greater fool theory’:
people may know it’s foolish to buy something expensive, but believe
there is a greater fool out there, who will later buy it off them at a
higher price.[22]
One of the most extreme examples of the greater fool theory is a
pyramid scheme. Such schemes come in a variety of forms, but all
have the same basic premise. Recruiters encourage people to invest
in the scheme, with the promise that they’ll get a share of the total pot
if they can recruit enough other people. Because pyramid schemes
follow a rigid format, they are relatively easy to analyse. Suppose a
scheme starts with ten people paying in, and each of these people
has to recruit ten others to get their payout. If they all manage to pull
in another ten, it will mean 100 new people. Each of the new recruits
will need to persuade another ten, which would grow the scheme by
another 1,000 people. Expanding another step would require 10,000
extra people, then 100,000, then a million. It doesn’t take long to spot
that in the later stages of the scheme, there simply aren’t enough
people out there to persuade: the bubble will probably burst after a
few rounds of recruitment. If we know how many people are
susceptible to the idea, and might plausibly sign up, we can therefore
predict how quickly the scheme will fail.
Given their unsustainable nature, pyramid schemes are generally
illegal. But the potential for rapid growth, and the money it brings for
the people at the top, means that they remain a popular option for
scammers, particularly if there is a large pool of potential participants.
In China, some pyramid schemes – or ‘business cults’ as the
authorities call them – have reached a huge scale. Since 2010,
several schemes have managed to recruit over a million investors
each.[23]