Pyramid schemes

We invite experiment participants to invest their endowment in a pyramid scheme with a negative expected return. In two samples, one from the general U.S. population and one from a major German university involving higher stakes, more than half invest regardless of their age, gender, income, and trust and fairness beliefs. Higher risk tolerance positively correlates with investment in both populations, whereas preference for positively-skewed risk, and lower cognitive skills explain investment only in the general U.S. population. We vary the level of assistance provided to participants in inferring the distribution of payoff from the pyramid scheme in four treatments, and find that only those requiring no further extrapolation of information are successful in reducing investment.