Biggest Fraud in History an Example of Decision Traps

This emerging, sad, enraging story is also a magnificent example of “decision traps” at work, specifically . . .

• Shortsighted Shortcuts. Relying on “rules of thumb”, convenient information, or readily available facts.
• Confirming Evidence: Knowing what you want to know and then seeing what you want to see in the information you gather.
• Misplaced confidence: Being too sure of yourself, your instincts, and your past experience. Or, being unduly cautious in evaluating probabilities outcomes.

Specifically, despite red flags galore, and it’s easy to say this in hindsight, investors kept shoveling money towards Bernard Madoff until it all came tumbling down in what the New York Times says is the biggest individual financial fraud in history . . . at least so far.

For years, investors, rivals and regulators all wondered how Bernard L. Madoff worked his magic.

But on Friday, less than 24 hours after this prominent Wall Street figure was arrested on charges connected with what authorities portrayed as the biggest Ponzi scheme in financial history, hard questions began to be raised about whether Mr. Madoff acted alone and why his suspected con game was not uncovered sooner.

As investors from Palm Beach to New York to London counted their losses on Friday in what Mr. Madoff himself described as a $50 billion fraud, federal authorities took control of what remained of his firm and began to pore over its books.

And the part about decision traps?

But some investors said they had questioned Mr. Madoff’s supposed investment prowess years ago, pointing to his unnaturally steady returns, his vague investment strategy and the obscure accounting firm that audited his books.

Despite these and other red flags, hedge fund companies kept promoting Mr. Madoff’s funds to other funds and individuals. More recently, banks like Nomura, the Japanese firm, began soliciting investors for Mr. Madoff internationally. The Securities and Exchange Commission, which investigated Mr. Madoff in 1992 but cleared him of wrongdoing, appears to have been completely surprised by the charges of fraud.

Made for simple, the problem, once again, “When something seems to good to be true, it’s because it probably is.”  Or maybe words from your mother, “Just because everyone is doing it doesn’t mean you should.”

Tags: decisiontraps, thinking traps, cogitive biases, behavioral economics, Bernard Madoff, Decision Making