I know the term but I’ve never actually been able to understand what it is and what happens in one
In: 2
Suppose I say to you “Give me £10, and I’ll double your money in a week.” You decide it’s only £10 and I’ve got great hair, so you trust me enough. You give me the £10. A week later, I return with £20 for you. You don’t know what I’ve done, but it’s worked. I then ask you to tell a few other people about how I doubled your investment. Well, now I’ve still got great hair, and you’ve got an extra £10, so you’re happy to oblige.
What you don’t realise is that I just found another 2 people who liked my hair and “invested” £10 each. With the now £30 that I’ve got, I went back to you, gave you £20, and pocketed the remaining £10.
Now that I’ve convinced you it works, I can use you as a witness to help me get £10 from another 5 people. I take this £50, use £40 of it to pay back my second group, and pocket the remaining £10. Now you’re up £10, as are the second group, and I’m up £20. Except I now owe 5 people £20.
So, I use you and the other two happy customers as character witnesses, and politely ask another 12 or so folk for £10. I can use £100 of that to pay back the other 5 people and pocket £20. Maybe I slip you three a couple of quid for helping me. So, I’m up about £40, but I now owe £240.
At each stage, everyone seems to be happy with their profit, and I keep earning a little bit. But, we need to recruit more and more people for it to keep working, at least doubling at every stage. It keeps growing wider and wider, like a pyramid. Eventually, I’m going to run out of new investors. Then, I’ll just be in a huge pile of debt, or hiding on an island!
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