Richard Wilson's blog

richardcameronwilson AT yahoo dot co dot UK

Kevin Connolly on the psychology of the Madoff fraud

leave a comment »

From the BBC

If something sounds too good to be true, I keep reading, that must be because it is too good to be true.

It is good advice as far as it goes and it raises the question of why so many wealthy, sophisticated savers were apparently conned into believing that Mr Madoff had come up with an investment strategy that allowed him to pay handsome returns even when the stock market was falling.

I asked a very senior regulator about this, a man who has been involved in formulating public policy for many years, and he said the answer was depressingly simple.

People are prone to believe what they want to believe, he said, and in rising markets a kind of irrational euphoria takes hold in which we are not inclined to ask difficult questions…

…I asked the regulator if the world would learn a lesson from the Madoff case and, depressingly, he was doubtful that it would.

These kind of schemes are only possible in a rising market and the next time the market is rising strongly – as it surely will one day – that old feeling of irrational euphoria will take over.

The reason we are easy to fool in the end, is because we are so good at fooling ourselves.

Advertisements

Written by Richard Wilson

December 21, 2008 at 2:39 pm

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: