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Academics, intellectuals, and skeptics prefer to think of themselves as smarter than the likes of Bernard Madoff, who until recently was a highly respected hedge fund manager. Here is one professor's account. Stephen Greenspan, a professor of Psychiatry at the University of Colorado and author of Annals of Gullibility, gives an academic account of how he was pulled in.Greenspan writes, "I lost a good chunk of my retirement savings to Mr. Madoff, so I know of what I write on the most personal level."
Here are some things that helped with the deception:
#1. Reasonable returns were promised. "Madoff promised modest rather than spectacular gains. Sophisticated investors would have been highly suspicious of a promise of gains as spectacular as those promised almost 100 years earlier by Charles Ponzi."
#2. Use of impressive and trusted people (franchisees) to pull the buyer in: I, along with most Madoff investors (except for the super-rich) did not invest directly with Madoff but went through one of 15 “feeder” hedge funds that then turned all of their assets over to Madoff to manage. . . The micro social context in which I made the decision to invest in the Rye fund came about when I was visiting my sister and brother-in-law in Boca Raton, Florida and met a close friend of theirs who is a financial adviser who was authorized to sign people up to participate in the Rye (Madoff-managed) fund. I genuinely liked and trusted this man, and was persuaded by his claim that he had put all of his own (very substantial) assets in the fund, and had even refinanced his house and placed all of the proceeds in the fund.
#3. Trusting consultants to make decisions in a business you know nothing about . . "it is safe to assume that deficiencies in knowledge and/or clear thinking often are implicated in a gullible act. . . In my own case, the decision to invest in the Rye fund reflected both my profound ignorance of finance, and my somewhat lazy unwillingness to remedy that ignorance. To get around my lack of financial knowledge and my lazy cognitive style around finance, I had come up with the heuristic of identifying more financially knowledgeable advisers and trusting in their judgment and recommendations. This heuristic had worked for me in the past and I had no reason to doubt that it would work for me in this case."
#4. An easily scammable personality: The double whammy of wanting to please and a propensity to act impulsively. "I happen to be a highly trusting person who also doesn’t like to say “no” (such as to a sales person who had given me an hour or two of his time). The need to be a nice guy who always says “yes” is, unfortunately, not usually a good basis for making a decision that could jeopardize one’s financial security. In my own case, trust and niceness were also accompanied by an occasional tendency towards risk-taking and impulsive decision-making."
Read the full article at Skeptic.com.