Money and Finance
- Links
Seth Alexander and Joel Cohen of MIT Investment Management Company talk to Sanjay Bakshi's class (LINK) Warren Buffett and the Great Salad Oil Swindle [H/T Linc] (LINK) Related book: Dear Chairman: Boardroom Battles and the Rise of Shareholder...
- An Interview With Robert Cialdini
Link to: The Uses (and Abuses) of InfluenceRobert Cialdini, considered the leading social scientist in the field of influence, was initially drawn to the topic because he saw how easily people could step over an ethical line into manipulation or even...
- Mets' Investor David Einhorn Could Up Stake; Protected In Case Of Loss In Madoff Lawsuit
According to a source close to the negotiations, Einhorn is structuring the deal so that he is in effect assuming the $100 million in debt as a protection in the event of a judgment against the Mets' owners in the hotly contested Madoff litigation....
- Fortune: How Bernie Did It
There were other mysteries, as we shall see. But even after it detonated five months ago in a fireworks display of betrayal and recrimination, Madoff's scheme -- possibly the biggest investment fraud in the nation's history -- has remained among...
- Interview With Bruce Berkowitz
Advisor Perspectives with an interview of Bruce Berkowitz on 12/24.-Based on your metric of free cash flow yield, how cheap or expensive is the overall market on a historical basis? The last tough environment was in 1987, but that was a sudden shock...
Money and Finance
Influence in the Madoff Case
Before getting to the two articles below, consider this quote from Warren Buffett:
“An argument is made that there are just too many question marks about the near future; wouldn’t it be better to wait until things clear up a bit? You know the prose: “Maintain buying reserves until current uncertainties are resolved,” etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear and you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”
Keep that in mind as you read through the articles and/or Robert’s Cialdini’s book, Influence. Uncertainty in investing can lead to attractive buying opportunities (per Buffett’s quote), but it is also a factor that leads to bad decision making, both on the conscious and subconscious level. That also reminds me of a quote from Ben Graham:
“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
**********
You don’t have to be a Dupe to be Duped: Lessons from the Madoff Affair
By Dr. Robert Cialdini
The Power of Persuasion under Conditions of Uncertainty
Under conditions of uncertainty like those Madoff cultivated, a pair of principles of social influence gain special traction: Authority and Social Proof. Let’s take each in turn and examine how they were commissioned by Madoff to advance his persuasive success.
Authority. When people are uncertain of what to do, they don’t look inside themselves for answers; all they’ll see there is vexing ambiguity. Instead, they look outside. One prominent place they look is to the counsel of experts, credible authorities on the topic. And, by any measure, Bernard Madoff certainly had the look of a credible authority in financial matters. He possessed expert credentials from long years in the investment industry. After starting his firm in 1960, he grew it into a juggernaut that was reported to be the largest dealer in NYSE-listed stocks in the United States. His firm helped to develop the NASDAQ, where he served as Chairman of the Board of Directors and where Madoff Securities became the exchange’s largest market-maker. Beyond expertise, Madoff spent substantial time and money establishing a reputation for possessing the second element of credible authority—trustworthiness. He was active in an organization oriented to the self-regulation of the securities industry, the National Association of Securities Dealers, and even sat on its Board of Governors. Moreover, he was widely known for his good heart via multiple charitable and philanthropic involvements.
Against such a backdrop, we can begin to understand why so many knowledgeable and experienced financial professionals followed Mr. Madoff down the garden path. Under conditions of uncertainty, they did not look inside (to their own knowledge and experience) for direction. They looked outside to credible authorities on the topic. And, there were few on the murky topic of derivative-based hedge funds more credible than Bernie Madoff.
Social Proof. Besides authorities, do people seek any other source of external information when uncertain of how to choose? They do. They look to—and then follow—what most people just like them are doing. Here, the proof of a correct choice isn’t based on knowledge or logic or empirical evidence; it’s based on social evidence of what one’s peers and those in one’s social network have decided to do. For instance, if the evidence were clear that your friends and coworkers were flocking to a new restaurant for lunch, you’d likely follow suit. At developing, honing, and providing this kind of social evidence, the Madoff client recruitment program had few equals. Madoff is Jewish, and so, too, are the majority of his victims, who were often recruited at country clubs by Madoff’s lieutenants, who were also Jewish and also members of the same country clubs. Plus, new recruits knew and were similar to past recruits, who served as unwitting sources of social proof that an investment with Madoff must be a wise choice “for someone like me.” Of course, fraud of this sort is hardly limited to one ethnic or religious group. Called affinity schemes, these investment scams have always involved members of a group preying on other members of the group—Baptists on Baptists, Hispanics on Hispanics, Armenian-Americans on Armenian-Americans. Indeed, Charles Ponzi, who gave his name to the infamous Ponzi scheme that Madoff copied, was an Italian immigrant to the U.S. who fleeced other Italian immigrants to the U.S.
………………..
The Bernard Madoff Case: Trust Takes Another Blow
Knowledge@Wharton
Knowledge at Wharton: Why is it that even sophisticated investors are being snookered in Ponzi schemes, still?
Maurice Schweitzer: The Madoff scandal is a story about several powerful influence principles working in concert. These are textbook principles. And in this case, you have four that are key. One is scarcity, where investors were told, "The fund is closed. But maybe I can get you in." It was exclusive, and there were some clients that got fired [because they asked too many questions]. The second key principle is authority. Madoff was somebody who in 1990 was the chair of NASDAQ. He pioneered electronic trading. He was a board member. He had this air of authority. And we know from the Milgram experiments and other studies that authority figures exert a huge amount of influence over us. Third, social proof. Everyone's doing it. From the Abu Dhabi Investment Authority to Line Capital of Singapore, to Stephen Spielberg and the owner of the New York Mets. You look around and everybody else is investing here. It seems like a reasonable thing to do. And fourth, the liking principle. We're influenced by people that we like. And here, social networks, meetings in country clubs, the charity events -- this is what brought people in. So you have in concert these four classic influence principles working together. And on the other hand, you have motivated reasoning. You have these investors who want to believe. They want to believe that they can earn the 10%, 11% interest, like clockwork. So they're willing to suspend their disbelief. And I think we failed to realize how powerful all of these factors are, when they work together.
-
“An argument is made that there are just too many question marks about the near future; wouldn’t it be better to wait until things clear up a bit? You know the prose: “Maintain buying reserves until current uncertainties are resolved,” etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear and you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”
Keep that in mind as you read through the articles and/or Robert’s Cialdini’s book, Influence. Uncertainty in investing can lead to attractive buying opportunities (per Buffett’s quote), but it is also a factor that leads to bad decision making, both on the conscious and subconscious level. That also reminds me of a quote from Ben Graham:
“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
**********
You don’t have to be a Dupe to be Duped: Lessons from the Madoff Affair
By Dr. Robert Cialdini
The Power of Persuasion under Conditions of Uncertainty
Under conditions of uncertainty like those Madoff cultivated, a pair of principles of social influence gain special traction: Authority and Social Proof. Let’s take each in turn and examine how they were commissioned by Madoff to advance his persuasive success.
Authority. When people are uncertain of what to do, they don’t look inside themselves for answers; all they’ll see there is vexing ambiguity. Instead, they look outside. One prominent place they look is to the counsel of experts, credible authorities on the topic. And, by any measure, Bernard Madoff certainly had the look of a credible authority in financial matters. He possessed expert credentials from long years in the investment industry. After starting his firm in 1960, he grew it into a juggernaut that was reported to be the largest dealer in NYSE-listed stocks in the United States. His firm helped to develop the NASDAQ, where he served as Chairman of the Board of Directors and where Madoff Securities became the exchange’s largest market-maker. Beyond expertise, Madoff spent substantial time and money establishing a reputation for possessing the second element of credible authority—trustworthiness. He was active in an organization oriented to the self-regulation of the securities industry, the National Association of Securities Dealers, and even sat on its Board of Governors. Moreover, he was widely known for his good heart via multiple charitable and philanthropic involvements.
Against such a backdrop, we can begin to understand why so many knowledgeable and experienced financial professionals followed Mr. Madoff down the garden path. Under conditions of uncertainty, they did not look inside (to their own knowledge and experience) for direction. They looked outside to credible authorities on the topic. And, there were few on the murky topic of derivative-based hedge funds more credible than Bernie Madoff.
Social Proof. Besides authorities, do people seek any other source of external information when uncertain of how to choose? They do. They look to—and then follow—what most people just like them are doing. Here, the proof of a correct choice isn’t based on knowledge or logic or empirical evidence; it’s based on social evidence of what one’s peers and those in one’s social network have decided to do. For instance, if the evidence were clear that your friends and coworkers were flocking to a new restaurant for lunch, you’d likely follow suit. At developing, honing, and providing this kind of social evidence, the Madoff client recruitment program had few equals. Madoff is Jewish, and so, too, are the majority of his victims, who were often recruited at country clubs by Madoff’s lieutenants, who were also Jewish and also members of the same country clubs. Plus, new recruits knew and were similar to past recruits, who served as unwitting sources of social proof that an investment with Madoff must be a wise choice “for someone like me.” Of course, fraud of this sort is hardly limited to one ethnic or religious group. Called affinity schemes, these investment scams have always involved members of a group preying on other members of the group—Baptists on Baptists, Hispanics on Hispanics, Armenian-Americans on Armenian-Americans. Indeed, Charles Ponzi, who gave his name to the infamous Ponzi scheme that Madoff copied, was an Italian immigrant to the U.S. who fleeced other Italian immigrants to the U.S.
………………..
The Bernard Madoff Case: Trust Takes Another Blow
Knowledge@Wharton
Knowledge at Wharton: Why is it that even sophisticated investors are being snookered in Ponzi schemes, still?
Maurice Schweitzer: The Madoff scandal is a story about several powerful influence principles working in concert. These are textbook principles. And in this case, you have four that are key. One is scarcity, where investors were told, "The fund is closed. But maybe I can get you in." It was exclusive, and there were some clients that got fired [because they asked too many questions]. The second key principle is authority. Madoff was somebody who in 1990 was the chair of NASDAQ. He pioneered electronic trading. He was a board member. He had this air of authority. And we know from the Milgram experiments and other studies that authority figures exert a huge amount of influence over us. Third, social proof. Everyone's doing it. From the Abu Dhabi Investment Authority to Line Capital of Singapore, to Stephen Spielberg and the owner of the New York Mets. You look around and everybody else is investing here. It seems like a reasonable thing to do. And fourth, the liking principle. We're influenced by people that we like. And here, social networks, meetings in country clubs, the charity events -- this is what brought people in. So you have in concert these four classic influence principles working together. And on the other hand, you have motivated reasoning. You have these investors who want to believe. They want to believe that they can earn the 10%, 11% interest, like clockwork. So they're willing to suspend their disbelief. And I think we failed to realize how powerful all of these factors are, when they work together.
-
- Links
Seth Alexander and Joel Cohen of MIT Investment Management Company talk to Sanjay Bakshi's class (LINK) Warren Buffett and the Great Salad Oil Swindle [H/T Linc] (LINK) Related book: Dear Chairman: Boardroom Battles and the Rise of Shareholder...
- An Interview With Robert Cialdini
Link to: The Uses (and Abuses) of InfluenceRobert Cialdini, considered the leading social scientist in the field of influence, was initially drawn to the topic because he saw how easily people could step over an ethical line into manipulation or even...
- Mets' Investor David Einhorn Could Up Stake; Protected In Case Of Loss In Madoff Lawsuit
According to a source close to the negotiations, Einhorn is structuring the deal so that he is in effect assuming the $100 million in debt as a protection in the event of a judgment against the Mets' owners in the hotly contested Madoff litigation....
- Fortune: How Bernie Did It
There were other mysteries, as we shall see. But even after it detonated five months ago in a fireworks display of betrayal and recrimination, Madoff's scheme -- possibly the biggest investment fraud in the nation's history -- has remained among...
- Interview With Bruce Berkowitz
Advisor Perspectives with an interview of Bruce Berkowitz on 12/24.-Based on your metric of free cash flow yield, how cheap or expensive is the overall market on a historical basis? The last tough environment was in 1987, but that was a sudden shock...