NOT THE SHARPEST KNIVES IN THE DRAWER: Madoff’s Victims: Gullible Or Greedy?
Just as the scheme transcended national borders, it left local regulators far behind. Its lies were translated into a half-dozen languages. Its larceny was denominated in a half-dozen currencies. Its warning signals were missed by enforcement agencies around the globe. And its victims are now scattered from Hollywood to Zurich to Abu Dhabi.
Writing in The Wall Street Journal, Mark Penn, CEO of PR firm Burson-Marsteller and former chief strategist for the Hillary Clinton presidential campaign notes:
For most of this century, con men and hucksters preyed on the uneducated and the elderly who couldn't read the fine print. Some still are.
But now we learn that the real mother lode for con artists is not composed of uninformed dowagers who were left an estate they don't know how to manage, but rather the Impressionable Elites of country clubs, and the rarefied hedge fund managers of Wall Street and Greenwich.
Penn’s explanation:
Here he is, in the most numbers-dominated part of our economy, and no one questioned his numbers. He sold himself to people on the basis of brand, and he got access to more marks by using the smart, rich and famous to introduce him to more of the smart, rich and famous. …
Elites are on information- and time-management overload, and the result is that they have been making big decisions with less information, not more. They throw their hands up in the face of adversity and complexity, relying upon the judgment of others instead of forming their own.
But one thing elites like is being elite – and that’s how “Uncle Bernie” hooked ‘em. One victim, former Ft. Lee, NJ mayor and stockbroker Burt Ross, tells The Journal: “It was harder to get into Bernie's fund than to get into Harvard.”
All of which argues in favor of gullibility, but game theory expert Len Fisher makes a more convincing case that “many of the Madoff's investors [were] cast from the same mold that Madoff was.” Here’s what he means:
Some of those investors must have suspected that he was a cheat but continued to invest because they thought they were benefiting from that cheating. In other words, they took him for a different sort of cheat from who he was - one who was using information gained from his market-making operation to earn illegal profits rather than one who was operating a breathtakingly audacious Ponzi scheme.
And by continuing to invest with Madoff under this belief, those institutional investors became complicit in that cheating. In fact, they became cheats themselves but without being aware of all that can happen once two parties become involved in a mutual cheating game. ..
Mutual cheating, though, leads to a series of classic dilemmas (brilliantly exposed in the late 1940s by game theorist John Nash, a Nobel laureate in economics) in which both parties end up worse off than if they had continued to cooperate.
Madoff and his investors got trapped by such a dilemma. The principal way to escape from such dilemmas is through mutual trust.
So Madoff’s victims must have at least suspected he was gaming the system – and they didn’t mind, as long as someone else got screwed. Isn’t that rich?
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