Money Doesn't Grow on Trees

A simple statement that everyone in Northern Ireland will be aware of, having most likely received it in the form of a mildly agitated response from a parent after a request for money, usually as a child (or perhaps not!).  As a consequence, I think that it would be fair to say that the vast majority of those in today's society would accept the notion that money doesn't grow on trees, you can't get something for nothing and if it sounds too good to be true, it normally is.



It seems that all of these notions were set to one side for a short while in late 2001 as a 'money tree' fad swept across Counties Antrim and Down.  Being from that part of the world myself, I remember this episode quite well and recall wondering how it worked as it seemed to fly in the face of all those clichés I mentioned in the previous paragraph.  For anyone not familiar with the story, I'll break it down using the diagram below:

Here we have JB.  JB has worked his way up to the top level of the money tree since his friends MD and AP, who form the next level down,  have managed to invite two friends each, who form the next level; in this case, JC, TS, GS and RP.  Once everyone in this tier has found two friends to join in, the system begins to pay out. 

 

In the case above we have TH and KP already in this tier.  Once six other investors pay the £3,000 entry fee, JB receives all eight entry fees, walking away with £24,000 - an incredible 700% in profits!  Each member in the tree then moves up a level; MD and AP move to the top level and continue the recruitment process until each person on the bottom level brings in two friends - that's sixteen more people, therefore £48,000 split between MD and AP, so they also leave with their 700% profit and so the process continues.  So long as people keep joining the tree, investors keep progressing up the levels and eventually reach payout - SIMPLES! 

Except it's not that simple is it? As with pricing bubbles, as soon as supply outweighs demand, problems occur. And this is what happened in Northern Ireland. Eventually, people ran out of friends and family to approach and the process of recruiting for the next level stalled and the system failed.  (Either that or people lost the belief that they would make it to the top tier.)  Anyone sitting on the tree lost their £3,000 and as the whole operation was conducted in pubs and restaurants, with each investment classed as a 'gift', there was nothing they could do about it.  Ouch!

More details of this story can be found in the BBC archives: http://news.bbc.co.uk/1/hi/northern_ireland/1647715.stm



Relating back to the title of this post, if people are generally smart and know that money doesn't grow on trees, they must know that a scheme like this is destined for failure, just as traders must know that the price of houses or the value of dot-com businesses can't keep rising forever!  Yet these things keep happening and people, companies and even countries still end up on the verge of financial ruin as a result of the bursting bubble.  I believe that the social sciences can offer (at the very least a partial) explanation for why this is.