Motivation Behind Participation in Multi-Level Marketing and Pyramid Schemes

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Illegal in quite a number of countries, pyramid schemes are a business model that relies primarily on the enrollment of new members with a promise of payment and other benefits and collecting bonuses and commissions for recruiting. Multi-level marketing is similar to pyramid schemes in many aspects; however, this model is rather implemented in corporations that are sourced by an unsalaried workforce. The AARP Foundation has found that such business ventures do not live for long, as within five years, they lose 90% of their representatives and distributives. Only 25% of all members make any profit, and the average person involved in such a scheme makes 70 cents per hour worked. This essay synthesizes existing research on the psychology of pyramid schemes and argues that specific individual characteristics predispose people to seize fraudulent opportunities.

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Bosley, Bellemare, Umwali, and York (2019) report that in the United States, all forms of consumer fraud translate into up to $45 billion in losses. According to the data shared by the Federal Trade Commission (FTC), every year, two million Americans fall victim to pyramid schemes and similar fraudulent business opportunities (Bosley et al., 2019). These figures may still be an underestimation because consumer fraud is underreported due to detection challenges. Besides, as previous literature suggests, pyramid scheme victims are extremely unlikely to report crimes to law enforcement for personal reasons (Bosley et al., 2019). Bosley et al. (2019) argue that retrospective data has little use in putting together a portrait of a person susceptible to partaking in pyramid and MLM schemes. For the data to be unbiased, three conditions need to be met: a person must be willing to recognize themselves as lied to, confess to others, and actively collaborate with formal reporting agencies (Bosley et al., 2019). Moreover, researchers find themselves at a loss when connecting defrauded people’s individual characteristics to the sources of their vulnerabilities.

For the reasons stated above, Bosley et al. (2019) conducted a lab-in-the-field that aimed to investigate the correlates of victimization but also participants’ patterns of judgment and decision making. Namely, the researchers staged an otherwise illegal Airplane Game that employed a pyramid scheme with elements of gambling and recruitment at the 2017 Minnesota State Fair with a total of 452 subjects. All participants were exposed to the same fraudulent offer, and it was up to them whether to keep the money or invest it further. For the sake of testing a possible intervention, people in the treatment group were reminded to be wary of the winning vs. losing odds.

Interestingly enough, Bosley et al. (2019) discovered that previous exposure to fraud in one’s circle of friends and relatives did not serve as a protective factor – it was quite the opposite. Close people’s involvement in the pyramid- and multilevel marketing schemes could make one more likely to join, probably, due to the friends and family’s silence about the outcomes. Religiosity and the perceived benefits of gambling also served as reliable predictors (Bosley et al., 2019). In contrast, the characteristics that prevented people from partaking in fraudulent businesses were cognitive ability, self-control, and urban residence (Bosley et al., 2019). The research hints at identifiable target demographics (less educated, religious, rural residents) that require education.

High unemployment rates in some countries and regions make pyramid schemes a viable alternative for people searching for a source of income. Jain, Singla, and Shashi (2015) investigated the case of multilevel marketing (MLM) involvement in India, where that business model had gained significant popularity in recent decades. In the pursuit of their research goals, Jain et al. (2019) recruited 400 participants and carried out a cross-sectional study that employed a 26-item questionnaire that contained questions on demographic variables and reasons for joining an MLM scheme.

The study is in line with the findings made by Bosley et al. (2019), who discovered that the likelihood of taking part in pyramid schemes is associated with the perceived benefits. Jain et al. (2015) argue that one such perceived benefit is freedom. In particular, they believed that MLM opportunities had an easy entry and required low investment; the participants were told that they could work any time from anywhere. Further, through factor analysis, Jain et al. (2015) discovered the construct of lifestyle that encompasses concepts such as accomplishment, leadership, and being one’s own boss. Even though MLM schemes have been proven generally unstable, financial security was also one of the main motivations (Jain et al., 2015). Overall, the study has shown that prospective MLM members have diverse motivations that are unified by the themes of self-development, freedom, and lifestyle.

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Indonesia is another attractive market for pyramid schemes. Recently, the Indonesian Financial Services Authority uncovered 262 firms operating on this illegal business model (Hidajat, 2018). Previously, policy interventions aimed at preventing people from joining pyramid schemes revolved around increasing financial literacy. It was assumed that the lack of knowledge about gambling and risky investment pushed people to trust fraudulent businesses.

Hidajat (2018) argues that by assigning the main role to financial literacy, previous researchers and policymakers might have ignored psychological and socioeconomic variables. The author recruited 43 participants from the cities of Bandung and Wonosobo. Both cities were known for the proliferation of pyramid schemes; however, while the former had a higher rate of literacy, the latter had a low level of public education. After analyzing questionnaire data, Hidajat (2018) discovered that contrary to popular belief, financial literacy was not a protective factor against participating in pyramid schemes. Financial literacy correlated with a higher income, and those who had more financial resources at their disposal were investing greater amounts of money into pyramid schemes. The study implied that solely appealing to the rationality in people may not be helpful when developing policy interventions.

Another approach to understanding the psychology of pyramid and MLM schemes is behavioral economics, an interdisciplinary field that draws from the law, psychology, and economics. Liu (2018) argues that MLM corporations exploit common behavioral biases to attract new members. Firstly, during the recruitment stage, consultants use imperfect disclosure: they use rare and unlikely examples of success and conceal the data regarding the actual average earnings of an MLM distributor. Liu (2018) hypothesizes that such representation of facts may appeal the most to people with low impulse control who prefer instant rewards as opposed to delayed gratification. In the United States, in particular, MLMs play into the belief in a “self-made man.” They offer not just compensation for representing and distributing but also an “identity enhancement” (Liu, 2018). According to Liu (2018), identity enhancement rests on two pillars: the idea of independence and grit (outcome’s direct correlation with effort). It is suggested that governments could try better regulation of what MLMs disclose, although, as shown in previous studies, financial literacy does not always reduce the risks.

Lastly, Schiffauer (2018) adds to the body of research by sharing the findings of her ethnographic study carried out in yet another developing economy, Russia. In particular, she observed a pyramid scheme business WIC Holding set up in rural Siberia. Like Liu (2018), Schiffauer (2018) found that WIC Holding victims shared a belief in achieving financial independence within a few months. In other words, the company’s consultants were manipulating people’s preference for quick fixes and instant rewards by describing how participation will help them make all their dreams come true within a short period of time. Another important narrative, especially common for developing countries, is the rags-to-riches scenario. In rural Siberia, where many people belong to the lower-middle class, WIL Holding holds out hope for overcoming financial difficulties.

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In both multi-level marketing and pyramid schemes, products and services come second to recruitment which soon becomes impossible. Even though the majority of participants never make a profit, such schemes have yet to lose their popularity. At the moment, collecting data on consumer fraud is challenging because criminal activity remains underreported. A staged experiment showed that religiosity, residing in rural areas, impulsivity, and poor cognitive abilities make people especially vulnerable. Though those demographics could be a target for financial literacy campaigns, better money management skills and information do not always serve as protective factors. Research also shows that socioeconomic realities play a role in predisposing disadvantageous people who believe in quick succession. Besides, pyramid and MLM schemes strike a chord with people desiring identity extension and enhancement through new opportunities.

References

The AARP Foundation. (2019). What is Multilevel Marketing (MLM)? Web.

Bosley, S. A., Bellemare, M. F., Umwali, L., & York, J. (2019). Decision-making and vulnerability in a pyramid scheme fraud. Journal of Behavioral and Experimental Economics, 80, 1-13.

Hidajat, T. (2018). Retracted: Financial literacy, ponzi and pyramid scheme in Indonesia. JDM (Jurnal Dinamika Manajemen), 9(2), 198-205.

Jain, S., Singla, B., & Shashi, S. (2015). Motivational factors in multilevel marketing business: A confirmatory approach. Management Science Letters, 5(10), 903-914.

Liu, H. (2018). The behavioral economics of multilevel marketing. Hastings Bus. LJ, 14, 109.

Schiffauer, L. (2018). Dangerous speculation: The appeal of pyramid schemes in rural Siberia. Focaal, 2018(81), 58-71.

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PsychologyWriting. (2022, July 17). Motivation Behind Participation in Multi-Level Marketing and Pyramid Schemes. Retrieved from https://psychologywriting.com/motivation-behind-participation-in-multi-level-marketing-and-pyramid-schemes/

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PsychologyWriting. (2022, July 17). Motivation Behind Participation in Multi-Level Marketing and Pyramid Schemes. https://psychologywriting.com/motivation-behind-participation-in-multi-level-marketing-and-pyramid-schemes/

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"Motivation Behind Participation in Multi-Level Marketing and Pyramid Schemes." PsychologyWriting, 17 July 2022, psychologywriting.com/motivation-behind-participation-in-multi-level-marketing-and-pyramid-schemes/.

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PsychologyWriting. (2022) 'Motivation Behind Participation in Multi-Level Marketing and Pyramid Schemes'. 17 July.

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PsychologyWriting. 2022. "Motivation Behind Participation in Multi-Level Marketing and Pyramid Schemes." July 17, 2022. https://psychologywriting.com/motivation-behind-participation-in-multi-level-marketing-and-pyramid-schemes/.

1. PsychologyWriting. "Motivation Behind Participation in Multi-Level Marketing and Pyramid Schemes." July 17, 2022. https://psychologywriting.com/motivation-behind-participation-in-multi-level-marketing-and-pyramid-schemes/.


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