How Madoff really did what he did

A special trustee, investigators and hundreds of reporters are delving deep into the mess that Madoff made.  They all promise to unravel the genius behind the elegantly sophisticated scheme that blind-sided and essentially robbed thousands of investors and millions of their benefactors of retirement, inheritance and charity dollars.  Unfortunately the fascination to understand and expose the scheme is ignoring a fundamental component of how he was able to pull it off: people.

Yes, people.  What fascinates me is not so much Madoff’s genius at masterminding and sustaining his con for so long, but the utter lack of competence on the part of authorities to expose him and the enormous power of endorsement.  Without the people in the SEC and other regulatory bodies doing their jobs and without people giving Madoff their money, none of his scheme was possible – or at the very minimum it would have been exposed years ago and billions of dollars earlier.  So while the media, investors, and the government are fixated on finding out what he did, few people seem to be interested in the real how and why. 

The how comes down to human behavior. The why relates to personal values.  Without understanding the how and why, someone else is already insidiously attracting investors and followers and taking them down a very dark path.

While it is naïve to say that personality tests could be used to uncover gullible tendencies or to uncover people not competent enough to differentiate truth from fiction, the truth is they can tell a lot.

For example, let’s talk about trust.  We can’t measure trust but we can measure traits that make people more trusting or skeptical.  People tend to trust people like themselves. 

“If everyone else is doing it,” one might think, “everyone can’t be wrong.”   Oh, really! 

At a very fundamental level, people tend to trust people more readily who share similar behavioral styles.  People who share similar values also develop a special bond.  If you then overlay these values with a tendency to be eternal optimists but lack a sense of curiosity, the susceptibility to be duped increases exponentially. Add a dash of impulsiveness to the mix and it’s easy to see how smart people can be hijacked without much effort.

Likewise individuals with a profound need to know and a bit of distrust might avoid becoming victims, not based on their intellect and wisdom but merely by personality.  The highly systematic, calculating, and curious mind  – the dutiful doubter – might force one to think twice or even three times before saying yes.  They are thinking, "the answer is no until you can convince me otherwise."

But let’s add another layer to this.  Even if you have the ‘right’ personality to make good decisions, you might not have the ability to understand and process all the information, especially if the situation is new and complicated.  It’s also important to be aware about you don't know, not just accept at face value what you do know. In the Madoff case, it’s what people didn’t know that got them caught in his web.

Even more powerful than behavior and personality is values. One way to think about values is in terms of means and ends. Values act as filters through which our deliberation is reduced and choices are made.

Values do not in and of themselves determine what is good or what is bad but provide a standard for individuals to decide what is better or best for him or her.

There are two types of values: means and ends. End values are beliefs about the kinds of goals or outcomes that are worth trying to pursue. Means values are beliefs about the types of behaviors that are appropriate for reaching goals. Mean values are often focused on the greater good (social) or personal (self-preservation).

Each person has a unique combination of means and end values that are used constantly to sort experiences and make future choices. It is clear from the explanations and excuses emanating from the mouths of duped investors how they became Madoff victims. Despite a growing suspicion about the high rates of returns, the ends for many of the investors justified the means. For those ends-driven people who also just happened to be less curious and more influenced by people of similar style and interests, the ugly outcome was predictable and inevitable.

Many of the charities on the other hand were blind-sided too by their social-driven means value. They accepted the unrealistic high rates of return as an end to meet their means. 

This failure to understand means AND ends obviously has ended badly for many.

Understanding how Madoff concocted his scheme is intellectually challenging but it will do nothing to prevent another travesty unless individuals accept some responsibility to understanding how he or she makes a decision. 

For parents, spouses and friends, it’s a personal obligation. For employers, it’s bottom-line critical.


Ira S Wolfe