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Multilevel marketing as a way of liquidating participants’ social networks

320px-Pyramid_scheme.svg

Here I’m using the term “liquidate” in the economics sense (conversion of an asset into cash) rather than the Rocky-and-Bullwinkle sense of the word.

Here’s the story: Katherine Chen writes:

An executive summary version of Ackman and Dineen’s Powerpoint analysis underscores the potential impact of DSOs [direct selling organizations] upon distributors’ networks:

Recruiting family members, friends, work and church acquaintances and others in their communities into a rigged game, one that is highly likely to exact financial and emotional harm on those loved and trusted by them, has an impact that cannot be repaired or recompensed with dollars alone.

In class discussions over the years, students have made similar conclusions, with some sharing experiences about how they no longer can socialize with relatives and friends who are members of DSOs because of the relentless pressure to buy and join. Others continue to do part-time work as DSO members who were recruited by family.

I’d only thought about the statistical issues regarding Herbalife’s claims, but, now that I see them, the above observations make sense. A multilevel modeling scheme is can be seen as a way of taking apart one’s social network and converting it into (a small amount of) money. In a sense that is true of all frauds and dubious business propositions so maybe there’s nothing special here, it’s just that in modern America the vast majorities of our economic transactions are impersonal and so don’t involve this trading off on connections.

There’s been a lot of talk about the role of trust in economic behavior; multilevel marketing is an extreme case in which personal relationships are being used as collateral.

16 Comments

  1. Nick Menzies says:

    I did not realise multilevel modeling would be quite so harmful to my social network!

  2. Rahul says:

    “Monetizing” might work better than “liquidating” in this context?

    “Liquidating” almost sounds like they are paying people to de-friend all their contacts. :)

    • Andrew says:

      Rahul:

      I wrote “liquidating” instead of “monetizing” because my impression was that by doing multilevel marketing, you’re destroying the personal relationships as you convert them to money. The way I’m thinking about it, you can “monetize” a relationship without destroying it. But if you “liquidate” the relationship, there’s nothing left.

  3. Rajiv Sethi says:

    Although this does have some pyramid scheme aspects it’s not necessarily unsustainable. I think of it as a within-network transfer of resources facilitated by a third party who takes a massive cut. Bit like Western Union, but with much higher transfer costs. Network density and quality are eroded as a result, so the welfare even of cash recipients may actually be lower in the long run (in which case it’s not sustainable).

  4. Anonymous says:

    Much as I dislike these schemes here are two potential positives:

    1. Resources are transferred in network and some nodes can now enjoy activities with others they may not have been able to afford previously, which may strengthen bonds. Some people don’t always want to be buying beers for your friends…

    2. Shy nodes now have an incentive to expand their network, which in turn may establish new connections across networks of old and new acquaintances.

  5. ben hyde says:

    Once upon a time I had nice credit card some years ago from AT&T. AT&T noticed I was an unprofitable customer and they started selling my name off to other companies. These other companies would then call during dinner, claiming to represent AT&T so they had the necessary “existing relationship”, and pestering me to buy life insurance and other obnoxious offerings. AT&T was both monetizing our relationship and hoping to liquidate it.

    While I continue to have high hopes for the ways that the Internet enables a bloom of new and interesting social connections it certainly gives one pause how quickly parasites that feed those networks have emerged. Interesting times :(

  6. Jeff Webb says:

    This reminds me of what Marx says of the family in the CM; it could apply to social network here. “The bourgeoisie has torn away from the family its sentimental veil, and has reduced the family relation to a mere money relation.” Marx was a prescient analyst of capitalism.

  7. Steve Sailer says:

    Anybody remember the Pyramid Scheme mania that swept California in spring 1980?

    In May 1980, a vast multi-level cash exchange craze developed in California that explicitly invoked the mystique of pyramids. Every night there were hundreds of house parties hosted by people who had gotten in earlier on this multi-level scam (perhaps the night before). My vague recollection from newspaper reports is that you’d go over to a higher-up’s house and sit with him under his pyramid while you gave him cash in return for your very own kit for building a pyramid out of wire and fabric. The Ancient Egyptian emanations from his pyramid would ensure that you’d get even more cash back from the suckers you’d recruit to buy your pyramid kits from you while sitting under your pyramid.

    Perhaps I don’t have the details right, but pyramid imagery was central to the experience, which made this Pyramid Power pyramid scheme hard to debunk. It was already pre-debunked. Anti-fraud authorities would go on the local TV news to denounce the pyramid schemes as “pyramid schemes,” which just served as good advertising. “Well, duh, of course it’s a pyramid scheme,” participants would laugh. “How do you think those Egyptian pharaohs got so rich that they could afford those giant pyramids? Through tapping the secret energy of Pyramid Power!”

    Participants tended to be relatively middle class white people in places like the San Fernando Valley. I’ve put contemporary documentation from the L.A. Times here:

    http://isteve.blogspot.com/2009/03/great-california-pyramid-scheme-mania.html

    When people complain now about the buttoned-down and bottom line-oriented mood that developed in the U.S. during the 1980s, you have to remember just how woozy the 1970s were. The Pyramid Mania of 1980 was a milestone in the mood shift from the 1970s to the 1980s.

    • Andrew says:

      This pyramid power thing sounds vaguely familiar. I had an uncle who lived in the San Francisco suburbs in that era, he spent a lot of time hanging around with gold-hoarding survivalist types (whom I imagine as being a bit less violent than the 1990s-era gun-collecting types, I think of them more as discontented suburbanites who subscribed to sleazy newsletters and made bad investments with their nest eggs). He and his family ended up converting to Mormonism and moving to a small town in the state of Washington. Around the year 2000 he was anticipating the forthcoming breakdown of society. I don’t think he ever got involved with pyramid power but it sounds like a similar kind of thing but maybe with a bit more of a political flavor.

    • K? O'Rourke says:

      OK maybe I caught the tail end in Toronto around 1984.

      My neighbor who was a faculty member in non-quant subject was pitching my wife and me.

      I remember the argument he gave “that the authorities don’t like it being easy for common people to make money” and the changing expression on his face (from defiance to dread) as I made him watch me calculate 8 * 8 * 8 … until it got close to the total population of Toronto. Always wondered if the dread was for losing his money or for already roping in some of his friends and relatives but resolving to pin the blame for their failure on them and keep his profit.

      Although part of it is superstitious reasoning, understanding numbers is a cure and likely a possible prevention here.

      • Rahul says:

        In my observations, not everyone who joins these schemes is a sucker who doesn’t understand numbers. Some participants know precisely what this is but will enter because they feel confident they can sucker other simpletons and then get out before the dang thing collapses.

        Another class of people is those that were suckers while joining but wise up quickly after they jump in but now don’t want to exit till they can con 8 more and get their share out.

  8. Steve Sailer says:

    The economy of Albania collapsed in the 1990s due to pyramid schemes (but, being new to capitalism, they had more excuse for being suckers than Angelenos in May 1980). The IMF reports:

    The Rise and Fall of Albania’s Pyramid Schemes

    Christopher Jarvis

    During 1996-97, Albania was convulsed by the dramatic rise and collapse of several huge financial pyramid schemes. This article discusses the crisis and the steps other countries can take to prevent similar disasters.

    The pyramid scheme phenomenon in Albania is important because its scale relative to the size of the economy was unprecedented, and because the political and social consequences of the collapse of the pyramid schemes were profound. At their peak, the nominal value of the pyramid schemes’ liabilities amounted to almost half of the country’s GDP. Many Albanians—about two-thirds of the population—invested in them. When the schemes collapsed, there was uncontained rioting, the government fell, and the country descended into anarchy and a near civil war in which some 2,000 people were killed.

    http://www.imf.org/external/pubs/ft/fandd/2000/03/jarvis.htm

  9. Tejas says:

    If you chose the right MLM company, you won’t take apart your social network but you will be spreading happiness in your network and see it grow by leaps and bounds. So far as I know, everyone who thought of earning money for himself failed in MLM. And the one who earned money are those people who worked for their team member’s income. It is simple, if your downline earns you earn. So, if you have chosen a good company, a good product, a good compesation plan, and worked for the benefit of the people who joined you, MLM can actually grow your social network and earn you much respect and money.

  10. Freudian slip from your post (with [sic] added where I think you’ve made unintentional errors):

    “A multilevel modeling [sic] scheme is [sic] can be seen as a way of taking apart one’s social network and converting it into (a small amount of) money.”

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