International Law

Simple Advice to Avoid a Madoff?

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Stephen Greenspans's essay on Gullibility, over at Skeptic, is an examination of gullibility and an examination of the Madoff Fraud. Stephen concludes his lenghty piece with saying

"I think it would be too easy to say that a skeptical person would and should have avoided investing in a Madoff fund.

The big mistake here was in throwing all caution to the wind, as in the stories of many people (some quite elderly) who invested every last dollar with Madoff or one of his feeder funds.

Such blind faith in one person, or investment scheme, has something of a religious quality to it, not unlike the continued faith that many of the "Drakers" continued to have in Oscar Hartzell even after the fraudulent nature of his scheme began to become very evident.

So the skeptical course of action would have been not to avoid a Madoff investment entirely but to ensure that one maintained a sufficient safety net in the event (however low a probability it might have seemed) that Madoff turned out to be not the Messiah but Satan.

As I avoided drinking a full glass of Madoff Kool-aid, maybe I'm not as lacking in wisdom as I thought."

There is no single decision rule to employ which will prevent frauds. Greenspan admits using a simple rule which left him open to the Madoff fraud:

"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."

This is a difficult rule to follow: how much easier is it to identify financially knowledgeable people than financially good opportunities?

Having used a simple and wrong rule which got him into trouble, Greenspan now seeks an equally simple rule to prevent him from getting into trouble.

Greenspan's article is interesting, and I will likely purchase his new book. But, if you think that your lazy thinking go you into trouble, then it is unlikely lazy thinking will get you out of trouble.

Full post as published by Misleading Advertising Law on January 07, 2009 (boomark / email).