International Law

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I thought it might be valuable to reflect on Cialdini's principles of persuasion in the context of the Madoff scandal. Cialdini posits that there are six principles of persuasion: consistency and commitment, reciprocity, liking, authority, scarcity, and and social proof.

The proper use of these principles produces a near automatic response of compliance.

Charlie Munger has dubbed combinations of these techniques which lead to crazy results as a lollapazoola effect.

Here is a quick categorization of the stories from around the net into 3 out of 6 of Cialdini's categories.  Tomorrow, we look at scarcity, liking and reciprocity.

Authority - Dressing the Part

Through those higher-profile parts of his operation, "Mr. Madoff was a pioneer in trading New York Stock Exchange shares away from the exchange. He is a past chairman of the board of directors of the Nasdaq Stock Market as well as a member of the board of governors of the National Association of Securities Dealers and a member of numerous committees of the organization, according to his firm's Web site."

Social Proof - Everyone is Doing It

"One question facing investigators and regulators, who missed a stream of red flags over more than 20 years, is how Mr. Madoff could have gotten away with a scheme this big, and for so long."

"The cops can't catch every crook, but a sophisticated financial system should be able to spot a multibillion-dollar Ponzi scheme operating in its midst for years.

A failure by the authorities to catch Bernard Madoff's allegedly fraudulent activities could count as one of the biggest regulatory slip-ups of recent times.

The Securities and Exchange Commission, with substantial enforcement powers and a specific mandate to protect investors, received warnings about Mr. Madoff over several years. While the SEC can't seriously pursue every tip, there was probably enough smoke emanating from Mr. Madoff's operations to look for a fire."

"European banks, including Spain's Grupo Santander SA and France's BNP Paribas, said Sunday their clients and shareholders face billions of euros of losses on investments with Bernard Madoff, underscoring the global reach of the alleged Ponzi scheme run by the veteran New York money manager."

"Some big names in Asia,HSBC Holdings andNomura Holdings, appear to have money at risk from the massive fraud alleged to have been perpetrated by New York money manager Bernard Madoff. However, their losses are likely to be limited.

HSBC (nyse: HBC - news -people ) reportedly loaned $1 billion to clients who invested about half a billion dollars of their own money with Madoff, who was arrested Thursday on suspicion of running a $50 billion Ponzi scheme that could be the costliest financial fraud orchestrated by an individual in history."

Consistency or Commitment

"At the risk of being even more of a pain in the ass than usual, NakedShorts would like to point out to the grown-up meejuh in general, and specifically its headline writers, that "big" returns were not the point. The con credibility factor was the -- cough -- incredibly consistent, non-volatile, returns."

"How can people protect themselves from Ponzi schemes? Catalano advises researching fund managers and double-checking the paperwork involved. "Frankly, there's a fair amount of trust that goes into it," he says."

"Some crimes are too perfect. Some facades too well-painted to be original or convincing.

A good hustler knows he must lose sometimes in order to win. THAT is the reflection of reality that makes it believable, and gives confidence to the punter who will shortly be taken out.

THAT was what was wrong with Bernie Madoff's ponzi. The people who were taken - like the Family Office and many others investors who in time will go public on their fleecing - wanted badly to believe they were onto to something that was so good that they ignored the most obvious signs of bogusness. It just didn't make sense.

It just didn't add up. Even Jim Simons earns it. There is no free lunch."

More on the other three categories tomorrow.

Here are the some 5000 stories about the Madoff Ponzi I have looked at.

Full post as published by Misleading Advertising Law on December 15, 2008 (boomark / email).