Sunday, July 11, 2010

Would I lie to you?

A few days ago, Sunny and I watched a TV show about 'Layered Marketing Schemes', basically legal pyramid schemes. The show's theme seemed to be based around 'How could anyone be dumb enough to fall for this?'…but I don't think that's fair. The truth is millions of people fall for cons in one way or another, and very few of them are actually stupid.

Before I start, let me give you a primer on exactly what 'Layered Marketing' is.

The idea is that a recruiter contacts you and offers you an amazing business opportunity selling their products (these products are what differentiate 'Layered Marketing' from a Pyramid Scheme and make it legal). However, you have to pay a startup fee, buy demonstration products up front and host parties to sell those products and your own expense.

Up until this point, it sounds like a perfectly legitimate business, but the problem is that the profit margins are tiny. Even if you're incredibly successful and a world-class salesman, after fees, purchasing the products, you only get a small commission on every item sold. Basically, you spend $2000 and work a 60 hour week to make $2100.

This is where the 'layered' part comes in. You know right away that you're not going to be able to earn a living selling these products…but you're told the real money comes from recruiting other sellers, because you get a commission on everything they sell, and when they recruit people you get a cut of those profits as well.

Basically it's a classic pyramid scheme. You're told that if your recruit five people, then they recruit five people and so on and so on, it's only a matter of time before you have a 'sales team' of thousands underneath you and you can make tens of thousands of dollars a month.

…Except that pyramid schemes are based on unsupportable exponential growth. In just five steps of five people recruiting five people, that works out to 15,625 people, that's over three quarters of the population of the town where I live. Once you get to ten steps it's nearly ten million people.

But the problem is that people don't really understand how exponential growth works, and it's presented in such a reasonable way. After all, all you have to do is recruit five people…and you don't need a sales force of thousands. In fact, this is a classic confidence trick where the heads of these businesses deliberately over-sell the idea. The recruiter tells you that you can have a sales force of hundreds and make tens of thousands a month…but the average person realizes that's undoable, and figures that a 'sales force' of just ten or twenty people is enough to make a decent living.

However, finding twenty people to invest thousands in a business is, at best, extremely difficult…and given that you make money from their sales, you have twenty people in the same geographical area trying to sell the same products to the same people.

Plus, and this is the most important part, when you're first recruited, who's to say you're not starting out as the twentieth person?

However, the most enlightening thing I ever read about so-called gullibility was a story written by a young nurse who fell for the classic Nigerian 419 scam…or advance fee fraud.

The way this scam works is you're contacted by someone claiming to need help transferring money out of Nigeria or Iraq or some other far flung country. You're offered a cut of millions of dollars and all you need to do is set up a bank account to have the cash transferred to. Then you discover there are certain unforeseen bank fees or insurance fees you're required to pay. Of course, the money doesn't actually exist and the scammers will continue bleeding you for as long as they can.

Now, it's hard to believe that anyone could fall for the 419 scam, but the people who do aren't necessarily stupid. Think of the number of times people have downloaded a virus by clicking the flashing link that says they've won a new iPod. The simple truth is that it's only obvious when you already know about the scam. Some old grandma who has just got her first computer so she can email her family may just receive an email from a 419 scammer and take it at face value. Why wouldn't she?

Well, that's what happened to this young nurse. She wasn't computer or internet savvy and received an email from a scammer who claimed he'd fled persecution in Iraq with his family's life savings. He just needed someone in the USA to transfer the money to…and if she helped him transfer the cash and get to the USA, he'd pay her two million dollars.

Of course, shortly after she agreed she received a panicked phonecall saying the bank where he'd stored the money wouldn't transfer the money until they'd received a couple hundred dollars for 'tax fees'. All his money was tied up in the bank, so would she be willing to pay the fees for him? After all, she was going to get two million as soon as it was released.

Notice the tactic here. It's a small amount of cash that's going to result in a massive pay off. Of course, as soon as she sent the money, she was told everything was fine and she could expect her cash in a couple of days…until suddenly there were more unforeseen costs.

Now this is the part people don't understand. Why would anyone who's been bilked out of thousands of dollars keep sending more cash?

Well, the answer is they don't realize they're being cheated. Plus, they think they're in a position where they can't afford to give up. As the nurse said:

"I'd sent all my savings, loaned money from the bank and even borrowed from friends and family. Each time is was just one more payment and everything would be fine. When I'd already sent around $15,000 I couldn't afford, was I going to give up when I was just $500 more away from getting my two million and wiping out all my debts?"

The scammers know this. In fact, towards the end game, they use it to ensure you'll keep paying. In the case of the nurse, they told her everything was fine
and gave her a username and password to a fake bank webpage where the money would be transferred. After checking it every day for a week, suddenly there it was, a deposit of just over fifteen million dollars, two of which were hers.

"I danced around the room, everything had worked out. I could pay back everything I'd borrowed. I called the scammer on the phone and we celebrated. We spent an hour talking about how we were going to get him a Visa to move to the US."

Of course, a day later, she went to the bank's website to discover a hold had been put on the cash. Supposedly some taxes hadn't been paid on the transfer and the account was frozen until someone paid another $5000 to cover it. Being so close, the scammer informed her he'd sold off all his possessions but had only managed to raise $2000, so if she could pay the other $3000, they were set.

That's the other big thing people miss. These scammers don't just use email. They're call you on the phone and develop a rapport with you. At that point, it's not just sending money, if she'd given up, she'd be totally screwing over her now homeless 'friend' who just sold everything he had to transfer the cash... and just $3000 on top of the $10,000-$20,000 she'd already sent would fix all their problems.

In fact, in some cases, the scammer will arrange for you to visit Nigeria or wherever (at your own expense, of course) where you'll be taken to a bank or 'security company' where you'll either talk to a 'bank manager' who will assure you the money is ready to go…or even be shown a great big box of money (counterfeit with a few real notes on top) or gold (spray-painted lead).

People who fall for confidence tricks aren't stupid, they're just fed a story and in the beginning are asked for a small investment for a massive payoff. People do that every week on the lottery because the small investment is worth the risk. Then they're led deeper and deeper into debt until they literally can't afford not to keep paying.

Basically, it's like gambling. When you've lost everything, you can walk away and definitely lose everything, or you can risk one more roll of the dice which could possibly fix everything.

Naïve? Yes. Desperate? Probably. Stupid? No.

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