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How the Grinch Stole Hanukkah

by Kirsten Sanford, Dec 19 2008

The timing is perfect to compare Bernie Madoff, the investment swindler, to Dr. Seuss’ Grinch. However, in this case, since the majority of Mr. Madoff’s clients were Jewish it’s not Christmas that was stolen, but Hanukkah.

I am fascinated by the story of Madoff and the billions of dollars he managed to steal from trusting individuals and organizations. $50 billion is such a large number, that the extent of his manipulations is truly mind-boggling. The list of those affected keeps growing.

Just today, I read a note from ‘The Scientist‘ Associate Editor, Elie Dolgin:

Some of the big losers include New York’s Yeshiva University, home to the Albert Einstein School of Medicine, which lost at least $100 million according to the Jewish Telegraphic Agency, and Technion-Israel Institute of Technology in Haifa, which invested funds raised from donations in Madoff’s securities firm and now estimates its losses at around 25 million shekels ($6.7 million), according to Ha’aretz. Several other charitable organizations that regularly donated to medical research, such as Steven Spielberg’s Wunderkinder Foundation, have also been hit hard, the Jewish Journal reported.

It’s not the get-rich-quick types who fell for Madoff’s scheme. He was able to trick veteran investors and cautious organizations, those who are normally skeptical of deals that seem too good to be true, into giving him their money. How did he do it?

The reality is that what he did wasn’t all that complicated. He used simple psychological tricks to gain the trust of the monkey brain.

Unfortunately, our monkey brain is fallible. All of our modern behaviors sit on the evolutionary base of our ancestors, which is finely tuned to acquire resources, which will bring a sense of security. If you have food you do not need food. If you know where food is you don’t have to search for it. If you know when food is coming you don’t need to worry about getting it. Not needing for things and being secure in your survival feels good. Money is the resource in our modern society that secures our survival.

Bernard Madoff offered people security. His investment plan gave investors a consistent return on their money – some 10-12% annually. That’s more than stable treasury investments, but less than what a risky investor can gain from playing the stock market. However, unlike the stock market, even when the market was rocky, Madoff provided smooth returns of a consistently positive nature.

That kind of security is hard to come by. And, while many intelligent people should have been asking themselves how such returns were possible, they instead let their growing money lull them into complacency. They lied to themselves that everything was fine because of the drug-like effect of that sense of security.

Secondly, Mr. Madoff was a trusted insider. He belonged to all the right clubs. He knew all the right people. His place in the hierarchy of society put him in a position where people would trust him easily. He was like the popular kid in high school who everybody wanted to know. Because of his social standing, people accepted his word at face value.

Again, this is a remnant of our monkey brain. Who wants to piss off the alpha monkey and get beaten, or worse, kicked out of the group?

Madoff played off of this inherent group behavior to get people to want to invest with him. He made his investment scheme an elite club. He invited certain people to invest, and turned others away. This very act made his business a commodity, a resource of immense social value. The monkey brain wants what it cannot have, and that is usually something that is held by another monkey.

Psychologically, the people who were scammed weren’t special in any way aside from having large sums of money to invest. They are human. They should have been more skeptical of the deal set before them, but for most it is hard to argue with the monkey brain.

From the BBC:

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

17 Responses to “How the Grinch Stole Hanukkah”

  1. Max says:

    “They lied to themselves that everything was fine because of the drug-like effect of that sense of security.”

    So it’s kind of like Social Security, hehe.

    He’s lucky this isn’t China, where a conman was executed last month for bilking investors out of $417 million in a bogus aphrodisiac ant-breeding scheme.

  2. JonA says:

    the majority of Mr. Madoff’s clients were Jewish

    Where did you hear/read that?

  3. Beelzebud says:

    No Max, it’s not like social security, because social security will be there when people need it, contrary to what the “privatize everything” crowd says.

    If you think SSI has problems just imagine how magnified they would be had the funds been dumped into the current market.

  4. Dread Polack says:

    Thanks for that, Kirsten.

    One of my personal pet peeves is when people take stories like this and spin them, personally, into evidence that the world is full of “stupid people”- a group that they, of course, don’t belong to.

    We had snow here in MN on Monday, and traffic was slow. If I had a nickel for everyone who complained about “stupid people on the roads,” I could retire. No doubt, 90% of the people spun out in ditches said the same thing.

    I think skepticism is about getting over this, and it’s an important lesson in reminding ourselves that we’re not part of some club immune to this.

  5. it’s not like social security

    Because those who pay have no choice.

  6. Beelzebud says:

    Spoken like a selfish Libertarian that rejects a modern society.

    You have a choice. You could always move to a third world country where there is no safety net.

  7. Spoken like a selfish Libertarian that rejects a modern society.

    You have a choice. You could always move to a third world country where there is no safety net.

    Ah, the “love it or leave it” argument with a dash of ad hominem. How lovely.

    If I leave the country then I will opt out of the system, hmmm. Why don’t I just stay in the country and opt out of the system? If the system was sound it wouldn’t matter, plus the country would get the benefit of my productivity.

  8. tudza says:

    So how much of these loses are really loses? I mean, are we counting what were *supposed* to get back minus what we put in as a loss?

    Freakanomics was asking how ths figures given in the news were arrived at. I haven’t heard an answer yet.

    Also, a radio show I was listening to about this mentioned past Ponzi schemes where the accounts and the law called in the money from people who were “lucky” enough to get paid off before the scheme fell as profits from fraud and gave it back. There were still loses, but a good precentage of the principle got returned.

    By the way, the stupid people on the road are indeed everyone but me. By this I mean I am pretty certain in most cases that if I was the only person on the road I could get home safely since I wouldn’t have to worry about hitting anyone when I did a 360 at the intersection and I could go as slowly as I wanted. I’m saying you misunderstand why people are saying everyone else is a stupid driver in this case.

  9. Ian Mason says:

    Ah, but the people who invested DID think they were special. They were part of the “right set”, the elite with acess to the rewards they were sure they richly deserved – one of our own will never let us down. From what I can understand, Madoff also played an “ethnic loyalty” card with regard to many Jewish institutions – one of our own will never let us down.
    Loyalty to the clique, the clan, the Lodge etc. – it’s en effective piece of psychology. The British upper classes never dreamed that Philby, Burgess, Blunt, Maclean, Cairncross and a lot of others could be turncoats. They were all “the right sort of chap, what?”
    We are human, so we need trust and loyalty but we also need to be skeptical. As Oliver Cromwell said: “Put your faith in God, but keep your powdwer dry.”
    Not stupid, Old Ironsides.
    Compliments of the season to you all (Honest)

  10. Abelardo Duarte says:

    In my home country, Colombia, we have had a bunch of pyramids lately. Some with elaborate schemes like DMG, who exploited regulation loopholes by giving you prepaid cards that you could exchange for goods at their store. The 100% return was only given after six months, and you could exchange it for cash or for goods if you wanted. So in fact they where trying to mask this scheme as a comercial 100% return rebate operation of some sort.

    This kept on going for years, and with the use of money laundering this particular scheme was able to always pay customer returns back. By word of mouth these people where able to gather about 200.000 customers!

    The government intervened and they found that the owner of the scheme had several ferraris, political and underworld contacts, mansions, yatchs, etc. I always suspected this thing was a pyramid, they even evangelized you so that you use the appropiate language (they actually taught people not to talk about investment, they had to talk about prepaid cards, in an attempt to exploit loopholes in the law!). They also made you idolize the owner of the scheme David Murcía Guzman, (his initials where the name of the company). To this day his customers think he is some kind of great benefactor who gave money to the poor unlike those evil banks who steal your money. This brainwashing seemed to work, some people right now are standing in front of the jail where he is being held, demanding his freedom.

    I think that what finally convinved people of giving their money to the scheme was simple, when you see your neighbor getting a 100% return and bragging to you about it, you wont resist the temptation. Also, people thought that the government was allowing this operation because they weren´t doing anything about it. In reality the government and the law where acting, but too slowly, they were negligent about this whole thing. In fact the government had all kinds of recording relating this scheme to drug money laundering but no action was taken for a long time. If you want to learn more about ponzi schemes or pyramids and their dangers you can search mmm (russian pyrmaid that owes 4.5 billion usd to their customers) and the albania catastrophe where the pyramids are blamed for 2000 deaths.

  11. Max says:

    Do the conmen who run pyramid schemes hope to take the money and run before the thing collapses?

  12. Abelardo Duarte says:

    Some of the conmen know when to run for it, with a pyramid called GFA Gestiones y Finanzas in Armenia, Colombia that was the case. With other schemes running in the city, people where in an investment frenzy, some people setup an office for two weeks, gathered the money and escaped without even giving out the first payments. Another called J&J in the same city also escaped.

    Others like Madoff or David Murcía in Colombia genuinely think that they can maintain their business running. After all it has worked for years up to that point, and because of customer reinvestment they have been able to keep their liquidity high. When you argue with them that they dont have the money to repay everyone back, they usually say that banks never have that amount of money either. And that argument is correct, the bank doesn´t have enough liquidity to pay everyone back, but they have enough to pay their daily obligations. The difference is that banks give out moderate returns and have mandatory bank reserves, unlike the schemes. With the credit crunch a few months back and with people suddenly needing the liquidity that banks weren´t offering, things got tough for Madoff, just like it happened to citibank or lehman. Madoff ran out of money and was a victim of the economic crisis.

    So in the end I think these conmen aren´t so intelligent either, some actually think that they are some sort of geniuses. They are a victim of their own vanity.

  13. sonic says:

    I didn’t know that monkeys engaged in Ponzi schemes.
    Do you have a reference for this?

  14. BB Wolfe says:

    Not skeptical enough? You’ll find out eventually, I’m sure, that Mr Madoff DIDN’T do all this on his own. He couldn’t. See what finance expert Catherine Austin Fitts says on the topic. Anyway, Madoff’s touching confessions (“It was all ME, no-one else” / “I’m just a greedy so-and-so” / “You guys caught me red-handed! Put the cuffs on, it’s a fair cop!” etc) are a little too candid, I feel. I think this particular monkey is covering up for a few Significant Others.

  15. Dave Friedel says:

    When times are good, make money. The word “make” in business terms can mean expand, deal, and spend.

    When times are bad, save money. The word “save” in business can mean scrutinize, audit, and analyze.

    In my experience, that difference in the business world between “make” and “save”, changes how a person thinks… even a brilliant person.

    Look at those who were not scammed by Madoff. I’d be willing to bet the majority of them were badly burned in prior “bad” times when they learned to scrutinize, and just carried that behavior to the “good” times.

    Even millionaires have to learn the hard way.

  16. With his credentials, Madoff had a lot of positives going for him.

    I think it would be more significant to see the order in which Madoff took on clients, not who he rejected. Potential investors might have had more confidence to see a clients such as Yeshiva University signed on, assuming that such an institution would require close scrutiny of Madoff’s investment plan.

    People might also have had more confidence and willingness to think well of Madoff on seeing that Madoff appeared to be concerned with assisting non-profits, such as Wunderkinder Foundation. Geez, he really was a rat, no?

  17. Phillip says:

    I can’t help thinking the US government is somehow involved in this too.