How Bernie Madoff with our Money

We all know the name Bernie Madoff, perpetrator of the biggest Ponzi scheme ever in American business. It’s estimated that $36 billion was invested with Madoff’s firm and that upwards of $18 billion is still missing.

A few weeks ago I was in Cleveland to speak at the local chapter of the Chartered Property Casualty Underwriters (CPCU). I was asked to talk about ethics so I decided a unique approach for this insurance group would be taking a look at Dr. Cialdini’s principles of influence and how they were used by Bernie Madoff. The title for my talk was “How Bernie Madoff with our Money.”

When I talk about the principles of influence I usually refer to ethical influence and persuasion so talking about the unethical use was an interesting change for me. The principles of influence tap into the psychology of human behavior – what causes someone to say “Yes” to a request – and they are powerful! Social scientists and behavioral economists have been scientifically studying human behavior for more than five decades so there’s plenty of data to back up that statement.

Con men may not know the science but through trial and error they quickly figure out how to use the psychology to their advantage. I think it’s important that people understand the principles not only to become more adept at ethically influencing people but also to avoid being manipulated by con men such as Bernie Madoff. I’m going to briefly describe each principle then share something Madoff did that helped him continually bring in new investors for decades. After all, Ponzi schemes depend on a continued inflow of investors and money or else they quickly collapse, so landing new clients was of the utmost importance for Madoff.

ReciprocityWe feel obligated to give back to those who first give to us. When someone does us a favor we want to return the favor in some way and silly as it may sound Bernie made it seem like he was doing his clients a favor by letting them invest with him. After all, his clientele were the rich and famous, he’d been a glowing success for decades and he was well respected. It was a privilege to let him handle their money. The favor was returned as people told others about him and new clients came by way of referral.  

LikingPeople like to do business with people we like, especially those who are similar to them. Madoff tapped into this principle based on his similarities to many of his clients. For starters, he recruited from his country club. That’s not out of the ordinary at all because men gauge one another’s character a lot based on shared experiences like golfing. In addition to this, Madoff tapped into similarity through his Jewish heritage because many of his victims were Jewish and trusted him more based on this.

ConsensusWe feel more comfortable doing what everyone else is doing or doing what people just like us are doing. If you’re rich then you hang with people who are rich too. Inevitably conversation turns to business so undoubtedly Madoff’s name was passed around like the offering plate at church. If you know many of your most successful friends invest with someone that’s going to give you pause to consider making a switch.

AuthorityPeople tend to trust those who are viewed as experts and Bernie had this one down! He’d been investing successfully since the early 1960s, but what was more impressive was that he helped start the NASDAQ. His trustworthiness was impeccable because he also served as the Chairman of the Board for the National Association of Security Dealers. Why wouldn’t you automatically trust him with those credentials on his side?

ConsistencyWe like to be consistent in what we say and do because when you do something you usually do it because you believe it’s the right thing to do. If someone asks who you invest with and whether or not you’re doing well of course you’ll respond positively. Being the con-man he was, I’m sure Madoff occasionally asked his biggest clients for referrals and recommendations which they were probably all too willing to do. After all, it would be inconsistent not to.

ScarcityPeople want more of what they can’t have or something that is hard to come by. I don’t think Madoff’s firm was one in which any person could pick up the phone and ask to open an account. When you’re dealing in the billions like he was it tends to be a very exclusive club and the more exclusive, the more people wanted in. How would you feel if you knew a business only took on a limited number of new clients each year and you were one they were considering? Most people would jump at the chance.

So there you have it, a quick overview of some of the psychology of How Bernie Madoff with our Money. Hindsight is 20/20 so it’s easy for us to look back and think we’d never be fooled in such a way. However, think about the kinds of people who invested with him – the rich and famous – people who were smart or had smart people managing their money. No, the reality is we’re all susceptible because we’re human and the same psychological pull would be at work in us. Madoff’s situation and science both confirm that. Here’s my advice to you; continue to learn about influence, keep your eyes and ears open, and learn to trust your gut because when something seems too good to be true it usually is.

Brian, CMCT
Helping You Learn to Hear “Yes”.


3 replies
  1. Merri
    Merri says:

    Great post, Brian. What a fun approach using the same information to explain the extremes – when it is useful influence and when it is distructive. Our listeners are motivated by either pain or pleasure, so you're motivating someone in either case. Thanks!


Trackbacks & Pingbacks

  1. […] did that happen? How did it happen again with Bernie Madoff? Why will it happen again? Three big reasons – recency bias, consensus and […]

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.