Direct Sales and MLM

FTC Experts Do a Study on Risk-Taking, Preload Study Outcomes

Kevin Thompson

"As a general rule, whenever your intuition conflicts with that of an economist, bet on your intuition.  Economists are reverse indicators: they are ~always wrong." - Nassim Nicholas Taleb.In case you were wondering, I'm not an academic. I do not pretend to speak the same language. On occasion, I really try to force myself to read their material to better understand their angles, hoping to stretch my own thinking. Stacie Bosley is an economist that teaches at Hamline University. Bosley is frequently hired by the FTC as their go-to expert in their pyramid scheme cases, most notably the FTC's lawsuit against Vemma (report here), most recently in the FTC's latest action against Success by Health (expert report here).

In years prior, the FTC's go-to expert had been Dr. Peter Vander Nat. Vander Nat preferred, to his credit, a more objective math-based approach when determining whether a program was operating illegally. This math-based approach proved challenging for the FTC, giving them unnecessary hardship in the BurnLounge case i.e. due process arguments because nobody understood the formulas. Since BurnLounge, the FTC has completely departed from Vander Nat's formulaic approach and chosen to go with a more touchy-feely approach instead, i.e., Behavioral Economics.As I've written in the past, while the FTC recognizes the legitimacy of the MLM industry, their chosen expert did not. Vander Nat never once found an MLM legal. Bosley, based on her declarations and statements to the media, obviously thinks in the same vein.

Academic Article: Decision Making and Vulnerability

I read a study of hers done in collaboration with a few other academics. Titled, "Decision making and vulnerability in pyramid scheme fraud." The article was published in 2018.  Since the article was about decision making and risk-taking, I was intrigued.  The "study" was a bit unsettling and gave me a glimpse into how these people play ball.  I could attribute my confusion to my non-academic pea brain, but let's see what YOU think.

The Setup

It's all there below. They got 450 people at a career fair to participate in a survey/game. They got demographic data on the participants, e.g., age, race, political affiliations, genders, religious preference, etc. They then presented them all with a hypothetical scam. Specifically, they were asked to choose whether to participate in an airplane game (pyramid scheme). If they chose to forgo the airplane game, they walked away with $5. If they chose to participate with the low odds, they could potentially walk away with $10.The airplane game is an old form of fraud. Recruit X, get them to recruit Y, get them to recruit Z, get paid in the end. The problem: The airplane game flames out, leaving the many losers supporting the few winners.

This is where it gets weird(er). As explained above, if they successfully recruit 40 people (3x3x3), they can "cycle out" and earn the reward. But wait, there are rules to this scam. There are only 2,000 people that can be recruited (see the second-to-last bullet above). And you're the 40th person that's been recruited in someone else's airplane game.'s really just a math test, right?  It's a study in...decision making?  If they say so...


In the paper, in the FOOTNOTES, it states,

Entering the game at the fourth level, sufficient recruits are needed through the seventh level to become a Captain. At the seventh level, the cumulative number of participants required exceeds the [2000 people limit] provided in the Airplane Game offer. Given that this is a hypothetical game, participants cannot adjust their recruitment speed to secure needed recruits before the population is exhausted and all participating subjects are assumed to have the same recruitment cost function, meaning that all participants recruit with equal speed, effort and success.

In other words, when you join this pyramid, you have to figuratively sit and wait while everyone else recruits the remaining people BEFORE you can start. And, in order for this grand experiment to work, you have to assume that the full population joins BEFORE YOU GET STARTED. Allow me to translate this into English: It's bullshit. There's a finite population of 2000 people for this hypothetical. If 40 people have already joined before you (as per the rules of this "experiment"), and assuming the remaining 1,960 people join're left with nobody left to recruit (or not enough people to fully qualify for cash).

By the time you start, you're not able to work through the 4 levels in the matrix. What sort of self-respecting scammer would sit and wait for other scammers to out-scam them before they started scamming?  This experiment is like some satirical version of the Saw movies. Choose A, you lose a limb. Choose B, you die. Fun, right? The real victims were the poor suckers that went to the career fair hoping to get a job and got roped into a 1-hour experiment for $5.        

What Did We Learn?

I'm not able to make sense of it. I've included one of the charts below. I guess, based on my read of the chart below, if you're a Republican earning between $60 to $80k, you're likely bad at math (as per the "uptake percentages"). I don't know. And I have a suspicion the study is not about learning anything, it's about proving a pre-existing bias and adding credentials to better impress the FTC.  

The outcome of this study, as I can deduce in the conclusion, is that pithy slogans are important to properly educate potential victims before they engage in fraud.  This is their suggestion: "If the offer asks you to pay and recruit, reject and report."  Brilliant.


The study does nothing to account for the ultimate difference-maker that separates the great from average.GritWe're not all robots running around in a simulation, are we? Is this how the academic community perceives network only suitable for people that are bad at math? What about a person's ability and willingness to outwork the competition, to out-hustle the other participants? In the most basic of illegal pyramid schemes, people obviously recruit at different rates. While this fact is discounted in a footnote in their study, it's as static a phenomenon as gravity. Humans are unpredictable; thus, any model that tries to forecast human behavior is sort of pointless.  This is especially true, in my opinion, when you're trying to forecast behavior about money.    

It's not unreasonable to think that people join a program, knowing full-well the low odds while thinking they can out-perform the competition. Why was the element of "grit" not factored into the study? I come from a long line of risk-takers dating back to my great-grandfather that came to America from Italy when he was 15 with no parents. I have a difficult time reading about risk-taking from tenured academics that experience zero stress from a chaotic and evolving market.  I'm a "Never tell me the odds!" Han Solo wannabe. The clients I'm privileged to serve tend to fall into the same category. I'm not pretending to know what's best for you. We all have different tolerances for risk. I'm not suggesting that it's nobler to throw caution to the wind and shoot nothing but three-pointers.'s asinine to think that we live in a world where all of the risks should be known and fully understood before decisions are made. There will always be risk and the best sorts of returns are usually tied to risks that are largely unknown. The safer streets are crowded and they tend to pay less. Just ask an Uber driver.

When it comes to network marketing, prospects intuitively know the risks. They see the average earnings, they know the likelihood of success is low. They do the math in their heads and view the risk/reward as being asymmetrical. They risk losing the cost of enrollment plus some starter product in exchange for the possibility of generating residual income. They're not stupid for trying, as this research suggests, they simply believe in their own abilities.   In life, there are winners and losers. Network marketing is no different. Some people will make money, while others will lose. But contrary to what economists want you to believe, there is no shame in trying provided the downside is limited.  There is never improvement without skin in the game.  Ever.  And the very definition of "skin in the game" means risk of harm.  The variables in any venture will never be fully known or appreciated.  If this is news to you, welcome to adulthood.

More Insight

February 26, 2024
Clay Brewer
Thoughts A Brewin' Newsletter 7: The California Risk
Learn more
Learn more
February 8, 2024
Clay Brewer
Thoughts A Brewin' Newsletter 6: Culture is Dead
Learn more
Learn more
January 29, 2024
Brooks Brasfield
Breaking Bad? Navigating the Corporate Transparency Act for Small Business Owners and Commercial Real Estate Investors
Learn more
Learn more