r Ministry of Defence - Sri Lanka

Psychological Motives Behind Investing in Pyramid Schemes Jeopardizing Security

September 16, 2023

by Charani LCM Patabendige

Published on Ceylon Today on 12th September 2023.

Pyramid schemes are popularly known for promising easy money without legitimacy. Napoletano and Curry (2023) define pyramid schemes as follows: 'A scam where a so-called marketing company promises to help you earn big profits in exchange for recruiting new participants into the scheme’. There are also schemes done in the form of gift programs. On the surface, a pyramid scheme appears to be a legitimate company selling products or services, but the core goal is always to grow the number of participants in the scheme rather than increase product sales. New participants are typically referred to as investors, salespeople, agents, or distributors, or some variation of these titles. These pyramid schemes have emerged as a significant threat to the security of Sri Lanka, jeopardizing various aspects of security. Sri Lanka has also fallen victim to pyramid schemes, with people from different backgrounds becoming victims, while only a select portion of society benefits from them. In Sri Lanka, the Central Bank has recognized two types of schemes which are Naked Pyramid Schemes, which involve recruiting only with an entry fee, and Product-based Pyramid Schemes, which recruit people by selling products or services. The tragedy is that despite knowing the insecurity and illegality of these investments, people continue to invest in these schemes. Due to these reasons, pyramid schemes are prohibited in Sri Lanka, as stipulated in Section 83(C) of the Banking Act No. 30 of 1988.

Pyramid schemes jeopardize the security of the country economically, financially as well as it has social implications. In terms of economic and financial security, these schemes attract hard-earned money from individuals into a bogus scheme, and with the collapse of the pyramid, individuals will lose their income. This loss is always substantial because individuals incur an opportunity cost that could have been used for their retirement plan or invested in capital. Additionally, since pyramids collapse, this puts indebted people in even more financial distress, as some individuals take loans officially or informally to invest in schemes or liquidate their assets to earn more. Furthermore, after the collapse of pyramid schemes, people resort to litigation, which also leads to an extra burden and erosion of income. Moreover, people end up depressed and unstable, incurring health costs. In summary, pyramid schemes jeopardize both financial and economic security by affecting savings, income, assets, legal expense. In addition, pyramid schemes has sociological implications as well. Most of the time, the breadwinner or the counterpart of the family does not disclose their investment in the pyramid scheme to their spouse. Due to this, when the pyramid collapses, a family also collapses, causing chaos. The spouse who was not aware of the investment then feels devastated due to trust being broken and might have had dreams of building a house together or sending children overseas. This breakdown of the family has serious consequences for society because family is the basic unit in the society. Consequentially, this leads to people becoming isolated and hopeless which are mental health implications which would also lead to high suicide rates. This situation can be seen in Sri Lanka and the tragedy is it is escalating only. An example is, as reported by (Sri Lanka Mirror, 2023) a sports instructor from Walasmulla, who became entangled in an online pyramid scheme, sadly took his own life in the school's sports room, according to police reports”.

To address this situation effectively, it is essential to recognize that litigation, government circulars, fines, and imprisonment are not the sole mechanisms available. Instead, it is crucial to consider this issue as a psychological concern to understand why individuals act with short-sightedness, believing that it will yield long-term benefits. According to Hock and Button, there are participant-dominant and organizer-dominant reasons for joining pyramid schemes. Participant-dominant reasons for joining pyramid schemes include the appeal of a unique investment opportunity that promises substantial returns for modest effort and offers flexibility. Furthermore, the growing influence of social media has enabled pyramid schemes to expand rapidly. As per the authors, these schemes have the potential to grow exponentially when large groups of like-minded individuals are encouraged to promote them among others. Success stories from individuals who have profited significantly from the scheme are often used to inspire others to believe that similar outcomes are achievable. Organizer-dominant reasons for joining pyramid schemes involve high-pressure tactics. These tactics are described in detail by Snook (2005) and include using family members, friends, or trusted acquaintances to contact potential associates about an exciting business opportunity. Inviting these associates to an event or meeting, often scheduled once in the local area, where highly persuasive and pressured sales presentations are conducted. Finally, during these events, individuals are offered a unique, sometimes "time-pressured" opportunity to join the scheme. Understanding these psychological motivations behind participation in pyramid schemes is essential to developing more effective strategies for prevention and intervention.

These two methods are facilitated, promoted, as well as encouraged for many reasons. Therefore, it is crucial to look into the psychological reasons behind such investment irrespective of collapses in those schemes. After speaking with different individuals in the society, the following factors were derived. The most prominent reason is it is easy money. You invest a certain amount, and your success is dependent on recruiting new investors. Therefore, it is collecting people rather than spending money. The rationale behind going behind easy money is one of the basic instincts in people, which is greed. Some people mentioned that they feared being left out because the majority are a part of it. The fear of missing out and the mentality that 'I will lose a luxurious opportunity' drives people to invest in pyramid schemes. The majority of the people who are in schemes or who were invited to schemes were by friends, relatives, coworkers, or superiors. There is always faith and trust among each other. Due to the feeling of knowing the other people invest in schemes as well. In addition, peer pressure also kicks in job relationships and among friends because 'we all do it, why don’t you do it?.

Another reason which came to light was that investments were made due to the manipulative market strategies utilized by these schemers. These pyramid scheming people often post pictures in luxurious clothing, travel frequently, and associate with influential individuals. The desire to thrive and be exclusive like them draws people like a moth to a flame. When speaking with people who were schemers before but left out after a collapse of the pyramid, they mentioned that they invested because of the initial success. Some individuals claimed that they were drawn to it because they overestimated themselves, thinking they could recruit many. Strikingly, some people stated that they kept investing in schemes because they were reluctant to admit defeat. They hoped they could prove it was not a failure but a success story. On the other hand, there are people who became victims of schemes because they are financially illiterate. They lacked the knowledge, and they thought this was legitimate. When asked why so? And why didn’t you question, people mentioned that schemes appeared to be legal and genuine, and investors were well-to-do people in society. The majority of low-income earners and people in debt mentioned they invested in these schemes because they were desperate to find a way out of the economic crisis situation. Due to financial hardships at that time, they thought this was the best option.

With all being said, it is evident that a pyramid scheme, which appears to be lucrative, is a short-sighted investment that results in repercussions. It disrupts the economy, finances, mental well-being as well as the whole society. Since a pyramid scheme is driven by confidence, passion, interest, and curiosity, to deter and prevent pyramid schemes, laws, circulars, resolutions, and government directives are not the only facets to be adhered to. At this point, understanding psychological motives can be regarded as the first step in comprehending the root causes behind pyramid schemes and the path towards eliminating them.

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* Ms. Charani Patabendige is an Acting Research Analyst and a Research Assistant at the Institute of National Security Studies (INSS), the premier think tank on National Security established and functioning under the Ministry of Defence) The opinions expressed are her own and do not necessarily reflect the views of the Institute or the Ministry of Defence.



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