Stephen Greenspan is a psychologist who specializes in gullibility at the University of Connecticut, wrote an article this week using his expertise to understand why so many people—himself included—fell for Bernie Madoff’s chicanery. After a fascinating historical and psychological analysis, he concludes:
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 Mr. 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 Mr. Madoff turned out to be not the Messiah but Satan. As I avoided drinking a full glass of Madoff Kool-Aid—I had invested 30% of my retirement savings in the fund—maybe I’m not as lacking in wisdom as I thought.
