Psychology of believing in outlandish investment schemes

[jay santos]

This intrigues me.

A friend used to run a successful organization within WMA (the multi-level insurance/investment company that was popular a while back--not even sure if they're still in business). He would make outlandish assertions about the investments he was selling. He was college educated and should know better. I always wondered what the psychology was behind that.

Was he stupid or severely undereducated on the subject?
Was he the victim of intense brain washing campaign by his company?
Was he an out and out liar?
All of the above?

At first I thought he was stupid and brainwashed. I later believed he was dishonest. A good person doesn't promise old people 18% on investments with no risk.


A client I've been working with a lot lately is a CFO of a small company that appears to be an extremely unscrupulous seller of stock option strategies. This guy seems pretty smart and self aware and we're intimate enough i think he would be straight with me. I asked him if his company's products were legit and he was dead serious he knows they are. They've never had a single person who has followed the program not double their money in the first three months.

Seriously?? That's the story you're going with?

What's the deal with this?

[Uncle Ted]

A lot can be learned from studying the life and methods of "the talented Mr. Madoff" and his victims...

They wonder whether good old Bernie Madoff might have stolen simply for the fun of it, exploiting every relationship in his life for decades while studiously manipulating financial regulators.

“Some of the characteristics you see in psychopaths are lying, manipulation, the ability to deceive, feelings of grandiosity and callousness toward their victims,” says Gregg O. McCrary, a former special agent with the F.B.I. who spent years constructing criminal behavioral profiles.

Mr. McCrary cautions that he has never met Mr. Madoff, so he can’t make a diagnosis, but he says Mr. Madoff appears to share many of the destructive traits typically seen in a psychopath. That is why, he says, so many who came into contact with Mr. Madoff have been left reeling and in confusion about his motives.

“People like him become sort of like chameleons. They are very good at impression management,” Mr. McCrary says. “They manage the impression you receive of them. They know what people want, and they give it to them.”

As investigators plow through decades of documents, trying to decipher whether Mr. Madoff was engaged in anything other than an elaborate financial ruse, his friends remain dumbfounded — and feel deeply violated.

[...]

“He was a man with a good idea who was also a terrific salesman,” says Charles V. Doherty, the former president of the Midwest Stock Exchange. “He was ahead of everyone.”

While completely legitimate, the practice of paying for trading orders was entirely distasteful to blue bloods on the established exchanges who saw the actions, ultimately, as a threat to their livelihood. Around this time, Mr. Madoff began cultivating key relationships with regulators.

“He was the darling of the regulators, without question. He was doing everything the regulators wanted him to do,” says Nicholas A. Giordano, the former president of the Philadelphia Stock Exchange. “They wanted him to be a fierce competitor to the New York Stock Exchange, and he was doing it.”

Current and former S.E.C. regulators have come under fire, accused of failing to adequately supervise Mr. Madoff and being too cozy with him.

Arthur Levitt Jr., who served as S.E.C. chairman from 1993 to early 2001, has acknowledged that he occasionally turned to Mr. Madoff for advice about how the market functioned. But Mr. Levitt strongly denies that Mr. Madoff had undue influence at the S.E.C. or that the agency’s enforcement staff deferred to him.

[...]

“He appeared to believe in family, loyalty and honesty,” said one former Madoff employee, who asked to remain anonymous because of the continuing litigation and investigations. “Never in your wildest imagination would you think he was a fraudster.”

Despite all of the easy money that rolled into Mr. Madoff’s firm for much of its existence, financial pressures began to emerge there during the last several years after Wall Street changed the way securities were priced and as new competition emerged.

In his asset management business, however, Mr. Madoff continued to haul in fresh rounds of money from unsuspecting investors hungry for the predictable and handsome returns he booked year after year, without missing a beat.

Employees who were veterans in the New York and London offices were even allowed to invest with Mr. Madoff, according to people who worked at the firm. Some employees are said to have given Mr. Madoff a large portion of their life savings — all of which now appears to be gone.

Like so many others who invested with him, his employees weren’t lured to his funds simply by a promise of outsize returns. Rather, they say, they sought the security of investing with a man they knew and trusted. The Bernie they thought they knew.

Mr. Madoff’s confidence reminds J. Reid Meloy, a forensic psychologist, of criminals he has studied.

“Typically, people with psychopathic personalities don’t fear getting caught,” explains Dr. Meloy, author of a 1988 textbook, “The Psychopathic Mind.” “They tend to be very narcissistic with a strong sense of entitlement.”

All of which has led some forensic psychologists to see some similarities between him and serial killers like Ted Bundy. They say that whereas Mr. Bundy murdered people, Mr. Madoff murdered wallets, bank accounts and people’s sense of financial trust and security.

Like Mr. Bundy, Mr. Madoff used a sharp mind and an affable demeanor to create a persona that didn’t exist, according to this view, and lulled his victims into a false sense of security. And when publicly accused, he seemed to show no remorse.

[Katy Lied]

I think they have an ability to truly convince themselves that what they are doing is right. They are supreme salesmen, and convince themselves first. They compartmentalize their thoughts to avoid thinking about their inevitable discovery and punishment. It all becomes normal after a while.

We only read about the ones who are successful at doing it for a long period of time.

[Moliere]

They are dishonest, either with others or with themselves. Ted's article on Madoff is a good one.

There's a reason I Haven't started investing with a good friend of mine in my ward. It's not that I don't trust him, it's that I don't trust us.

[landpoke]

I worked for some folks like this. It was amazing to watch them, even when confronted with irrefutable evidence to the contrary, continue to insist that what they were doing made sense and would make their investors money. As KL noted these types are often supreme salesmen and their first sales job is on themselves.

My favorite moment, if you can call it that, was watching them justify the purchase of a company jet with investor money. Despite their claims that it would save the company money, a simple back of the envelope calculation showed that they could fly everyone in the company first class and still be money ahead. Their ultimate conversation ending response was "You just don't understand."

[byu71]

I think they have an ability to truly convince themselves that what they are doing is right.

That would be #1 based on my experience. Many, many times I had a fellow advisor come into my office and start telling me how great he thinks a certain investment is. Of course no one knows how something will turn out for sure, but I know in some cases this person is gearing themselves up to pitch this investment, especially if they are having a slow month. I am not saying these people are dishonest, but that is how self convincing goes.

Then there are those that take it to an extreme and they don't recognize the dishonesty because they have obliterated their conscience. I once told one guy what he was doing was bull shit and the commission was really driving him not the quality of the investment. He actually told me he pays tithing and therefor deserves to make a good commission. That is why I don't just assume because a person is religious they will be honest in their business dealings.

[TripletDaddy]

How interesting that you post this now. Over the weekend I was cleaning out an old box of stuff from a few years ago and I found a printed email with some information written on it. I was going to throw away the information because I no longer needed it when I decided to read the actual email that the paper was printed on.

The email was from a friend of mine in Springville, sent back in 2005 or 2006. Anyway, in the email he tells me about this awesome thing he is doing to make money....it is called 12daily pro.

I got a good laugh out of that. I remember that looney auto surf craze that swept through U-Mos like a virus. Everyone talking about their easy money from clicking on websites and ads.

Do we even want to know how many Cuffers participated in 12daily pro? I think those sorts of schemes are a litmus test for basic common sense.

[myboynoah]

This intrigues me.

A friend used to run a successful organization within WMA (the multi-level insurance/investment company that was popular a while back--not even sure if they're still in business). He would make outlandish assertions about the investments he was selling. He was college educated and should know better. I always wondered what the psychology was behind that.

Was he stupid or severely undereducated on the subject?
Was he the victim of intense brain washing campaign by his company?
Was he an out and out liar?
All of the above?

At first I thought he was stupid and brainwashed. I later believed he was dishonest. A good person doesn't promise old people 18% on investments with no risk.


A client I've been working with a lot lately is a CFO of a small company that appears to be an extremely unscrupulous seller of stock option strategies. This guy seems pretty smart and self aware and we're intimate enough i think he would be straight with me. I asked him if his company's products were legit and he was dead serious he knows they are. They've never had a single person who has followed the program not double their money in the first three months.
Seriously?? That's the story you're going with?

What's the deal with this?

Wow. So, are you going to give us his number or not?

[byu71]

I am sure everyone also realizes sometime someone can sell you on an idea they have and the idea just doesn't pan out. Nothing dishonest, it just didn't work.

I am thinking of something I got in on last fall. Someone I think very highly of and who has made a lot of money introduced me to the people putting the idea together. He put 6 times the money I did into the project.

It sounded like a great idea, but I knew it could fail. I didn't think it would fail as fast as it did.

However, I do not think for one second I was duped. My friend and I talked and recognized the concept had real potential, but we failed to recognize they didn't have a pragmatic person on their team, just dreamers.

[thesaint258]

The flipside is the psychology of people who invest with these guys. I've had clients invest large sums of money despite the fact the PPM with which they were presented discloses some serious risks. Basically, I've learned that investors look at the rate of return and the minimum investment. They ignore everything else in the PPM. I've worked on for both investors and the guys soliciting investments, and it's never pretty.

[il Padrino Ute]

How interesting that you post this now. Over the weekend I was cleaning out an old box of stuff from a few years ago and I found a printed email with some information written on it. I was going to throw away the information because I no longer needed it when I decided to read the actual email that the paper was printed on.

The email was from a friend of mine in Springville, sent back in 2005 or 2006. Anyway, in the email he tells me about this awesome thing he is doing to make money....it is called 12daily pro.

I got a good laugh out of that. I remember that looney auto surf craze that swept through U-Mos like a virus. Everyone talking about their easy money from clicking on websites and ads.

Do we even want to know how many Cuffers participated in 12daily pro? I think those sorts of schemes are a litmus test for basic common sense.

Never heard of 12daily pro. But I am interested in hearing more. Please have your friend contact me.

[mtnbiker]

I might have posted this before, but a number of years ago I saw a study that had kids trying to convince an adult to drink a beverage that was nasty and sour-tasting. The ones that were most successful (= best liars) also tended to be the most popular and dynamic leaders in the adjoining play areas. The survey results suggested that the most dynamic and charismatic leaders tended to also be really good liars, so we needed to be really careful to vet and monitor those who we choose for leaders.