How Bernard Madoff Made Off with My Money

Psychology professor Stephen Greenspan recently published a book about gullibility. He also lost a lot of money to Bernard Madoff's financial shenanigans.
...I was a participant — and victim — of the Madoff scam, and have a pretty good understanding of the factors that caused me to behave foolishly. So I shall use myself as a case study to illustrate how even a well-educated (I’m a college professor) and relatively intelligent person, and an expert on gullibility and financial scams to boot, could fall prey to a hustler such as Madoff.

Greenspan (no relation to Alan Greenspan) explores the social situations and emotions that lead people to invest their money in scams like Ponzi schemes, and how the Madoff situation got out of hand.
The real mystery in the Madoff story is not how naïve individual investors such as myself would think the investment safe, but how the risks and warning signs could have been ignored by so many financially knowledgeable people, ranging from the adviser who sold me and my sister (and himself) on the investment, to the highly compensated executives who ran the various feeder funds that kept the Madoff ship afloat. The partial answer is that Madoff’s investment algorithm (along with other aspects of his organization) was a closely guarded secret difficult to penetrate, and partly (as in all cases of gullibility) that strong affective and self-deception processes were at work. In other words, they had too good a thing going, for themselves and their clients, to entertain the idea that it might all be about to crumble.


http://www.skeptic.com/eskeptic/08-12-23.html#feature -Thanks, Eli Schwimme!

(image credit: Dan DeVore)

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While a dissection and thorough understanding of greed is important and worthy of study, i can't help but wonder if more attention and study should be paid to the people who were on to madoff and reported him.

what was their psychology and how do we encourage it? learn to listen to it?
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Many Wall Street folks took a few looks at the Madoff
'system' and not only stayed away, but repeatedly warned SEC. One thing that has not been mentioned is the fact that Madoff didn't have to convince everybody, just a few. I would suppose that less than 10% of investors or investment firms who were prospects got sucked in. That was enough. So we don't have to assume that Madoff was some super-con - just a regular one, working in a field with a lot of zeroes in the amounts.

Just so, the Nigerian scam at one time (maybe still?) was the second largest industry in Nigeria, bringing in billions of dollars per year, on what I would assume was a much less than 1% hit rate on their ads.
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