The Stuff That Counts

By Dian Vujovich

If all the allegations about Bernie Madoff’s Ponzi scheme prove true, the $64 billion dollar question is, “Why?”

Why does a guy with an apparent sterling reputation turn into a swindler? How does that happen? And what’s up with the trust his well-heeled clientele obviously gave him?

I asked Dr. Richard L. Peterson, of http://www.marketpsych.com , a Santa Monica-based consulting group specializing in those working in the financial industry, those questions. Here are his thoughts:

Q: How can a well-established guy like Bernie Madoff create investment schemes that wind up bilking his friends and business associates out of millions?

A: I think Madoff was legitimate for a long time. What probably happened was that he took some losses early on, and didn’t want to fess up to them. So, he doctored the books a little. Then he took extra risks to make the money back. But, lost again and again until he’d created a hole so big he’d never get out of it. I imagine that’s what the investigations will eventually demonstrate.

And something to keep in mind is that successful people don’t like to admit failure. Especially when they are older so they hide their failures. Then that becomes a habit. He probably wanted to keep his program going forever (until he died) but couldn’t keep up with redemptions.

Q: Why do you think so many wealthy investors trusted him?

A: Studies show that the trappings of wealth really do influence people to follow the advice of a wealthy person. A nice car, the right club memberships, nice clothes lead to unconscious influence over others. In those studies, people will deny that it has an influence, but when you look at behavior, they really do follow and take orders from the “wealthy-appearing.”

As for me, I think there’s a good chance Bernie had a little bit of larceny in his blood. On that note, John Kenneth Gailbraith says it best: “The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not.”