first person account of the madoff scam has a good article by Stephen Greenspan, a psychiatry professor who got robbed in the Madoff scam. The irony is that Greenspan is himself an academic expert on trust and gullibility. We should be grateful because he hasn’t retreated into bitterness and has provided a thoughtful account of the fraud. A few key bits:

  • Greenspan argues that gullibility stems from converging context, personality, emotion and poor reasoning. I’d add to his account that the social network is the structural component of the scam, as friends pull friends into the fraud.
  • Madoff’s scam was originally a legitimate investment fund. He only turned Ponzi when he started losing money and was embarrassed to admit it. It’s that legitimacy that allowed the scam to inititally succeed.
  • Madoff usually didn’t take the money himself, but actually worked through 15 professionally managed funds. Not only did it add legitimacy, but it meant there was a built in group of proselytizers – the fund managers – who could sell the fund. Also, it is possible to not even know you were even in on the scam because your fund manager may have moved your money into it.
  • Successful scams take on a quasi-religious fervor where people fail to apply their reasoning skills. For example, surrounded by acquaintances who also invested with Madoff, Greenspan ignored the warnings of a financially savvy friend. Much like a cult where your buddies insist all critics are sore losers.

I think the smartest thing in the article is the observation that anyone can be gullible. Think of any smart person you know well, and I bet there is some circumstance, some confluence of emotion and social pressure, where they dropped their reasoning and made a stupid, but easily aviodable, choice. A real lesson lesson in humility.

Written by fabiorojas

December 28, 2008 at 3:37 am

3 Responses

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  1. I’ve been meaning to write something about this. Maybe Monday.



    December 28, 2008 at 5:39 am

  2. “The irony is that Greenspan is himself an academic expert on trust and gullibility.”

    Now, doesn’t the best social science say that trust is best developed via positive expectations of others? Shouldn’t trust be a self-fulfilling prophecy?



    December 28, 2008 at 8:24 am

  3. […] Org theory points to this article by Stephen Greenspan who is a psychologist who studies gullibility and trust and claims to understand why he was himself taken in by Madoff scam. […]


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