Wednesday, January 07, 2009

Madoff, Greed, Gullibility, and Chanukah

[anatomy of gullibility]

The Bernie Madoff affair has both fascinated and disgusted most of us. Here is a old Jewish guy, a scion of the community, former head of NASDAQ, philanthropist extraordinaire, who turns out to be a common thief. To ask why he did it is foolish; like all con-men, he wanted the money, the admiration, and all that went with the illusion he peddled. We can easily understand what he was all about. What puzzles us is how he got away with it, how he conned so many for so long. That answer is a little more complicated.

Writing on, Stephen Greenspan (no relation to the other equally-trusting Greenspan) discusses the human foible of gullibility. The discussion is rather poignant given the fact that Greenspan lost some of his own money in the Madoff mess. Basically, if it looks like someone else is getting the goodies, we all want in on the deal:

The basic mechanism explaining the success of Ponzi schemes is the tendency of humans to model their actions (especially when dealing with matters they don’t fully understand) on the behavior of other humans. This mechanism has been termed “irrational exuberance,” a phrase attributed to former fed chairman Alan Greenspan (no relation), but actually coined by another economist, Robert J. Schiller in a book with that title. Schiller employs a social psychological explanation that he terms the “feedback loop theory of investor bubbles.” Simply stated, the fact that so many people seem to be making big profits on the investment, and telling others about their good fortune, makes the investment seem safe and too good to pass up. In Schiller’s words, the fact “that others have made a lot of money appears to many people as the most persuasive evidence in support of the investment story associated with the Ponzi scheme — evidence that outweighs even the most carefully reasoned argument against the story.”

. . .There are four factors in my explanatory model, which can be used to understand acts of gullibility but also other forms of what I term “foolish action.” A foolish (or stupid) act is one where someone goes ahead with a socially or physically risky behavior in spite of danger signs, or unresolved questions, which should have been a source of concern for the actor. Gullibility is a sub-type of foolish action, which might be termed “induced-social.” It is induced because it always occurs in the presence of pressure or deception by one or more other people. . .The four factors are situation, cognition, personality and emotion. Obviously, individuals differ in the weights affecting any given gullible act. While I believe that all four factors contributed to most decisions to invest in the Madoff scheme, in some cases personality should be given more weight while in other cases emotion should be given more weight, and so on.

Do read the full article to see these factors fleshed out a bit.

It has been well-publicised that Bernie is Jewish, as are many of his investors. This certainly brings scrutiny, if not shame, upon our community. It is interesting therefore to look at the situation from the Jewish point of view.

Rabbi Benjamin Blech, writing on, uses the history of Chanukah to put Madoff in perspective.

Chanukah, unlike Purim, doesn't celebrate the physical survival of Jews in the wake of a genocidal threat. It commemorates our ability to preserve Judaism at a time when the world around us worshiped totally different ideals. . .

When confronted with a culture that worshiped the holiness of beauty, the heroes of Chanukah maintained their allegiance to the beauty of holiness. The Greeks claimed that beauty is truth. The Jews insisted that only truth is beauty. The Greeks glorified the physical. The Jews insisted the spiritual has greater importance. The Greeks sanctified the gymnasium and the marketplace. The Jews worshiped in the Temple and the house of study. The Greeks idolized wealth. The Jews venerated values. . .

To those who ask how could the Bernie Madoff scandal have happened, the answer can only be that for far too many Jews today the Maccabees were wrong and the Greeks were right. Given a choice between assimilating with a conspicuous consumption culture that proclaims "he who dies with the most toys wins," or a more modest lifestyle circumscribed by Torah and mitzvoth (commandments), the tragedy is that so many Jews opted for the former.

Why were (the victims) all willing to assume a level of risk that simply didn't make sense? The answer undoubtedly is because our society was making it clear that it was far more risky not to make outrageous returns on your money, not to have a billion dollars if you only had half a billion, not to be super super wealthy if you are only in the to be pitied category of just the super wealthy.

When being just rich isn't enough, the rich have to risk everything to maintain their social standing.

So where does the real blame lie? Bernie Madoff was taking advantage of a social reality created by us, by our organizations, and yes even by our charities. Honor in Jewish life has all too often been meted out only by the measure of financial, rather than personal, worth. Only the millionaire could become a macher (an important man), and only the close-to-billionaire could dream of becoming a major Jewish leader or honoree.

Rabbi Blech advocates a return to tradition and faith:

The Madoffs of the world must be deprived of their greatest strength -- the power given to them by a Jewish world that has succumbed to values foreign to our faith and antithetical to our tradition. . .we have to identify again with Matisyahu and the Maccabees. It was they who looked at a world tempted by the materialistic visions of Hellenism and warned their fellow Jews that if they traded their holiness for the empty rewards of hedonism, that's what they would look like. And we too, if we make the mistake of choosing gold over God as priority, will be easy victims lying in wait, doomed yet again to Madoff mania.

Strong stuff, obviously, and a bitter pill for most of us to swallow. I, for one, am not quite ready to give up those finer things that I can still afford. However, Rabbi Blech's point needs to be considered by all of us. When our values become totally overwhelmed by the desire for the monetary and the material, we become lesser people indeed. While I don't think that money is the root of all evil, I begin to think that the pursuit of money comes close.

One final, somewhat tangential point to consider. Madoff declared his enterprise a Ponzi scheme just before his sons turned him in to the authorities. Could it be that ol' Bernie has one last trick up his sleeve? Could it be that the money didn't just vanish, but rather was stashed offshore? Will it be waiting for him when he gets out of jail in a few years? If he was smart enough to swindle some very astute people, he might be smart enough to pull off one last scam. We may never know.


Anonymous said...

So your answer to the ethical dilemma presented by Madoff's despicable acts is to skirt the issue by doing something any responsible Jew (nee, Rabbi Benjamin Blech?) would defy if it were done to them, i.e., blame it on ethnicity (Greeks). I realize you were quoting the Rabbi's thoughts on ancient Greece, but you (and he) also ignore a whole host of other attributes of both the ancient Greeks and ancient Hebrews in your rather narrow summation of ethnic "traits" of these groups) rather than attempt to get at the peculiarities of this case. Troubling indeed. Charges of anti-Semitism would be abundant if this were done by a Gentile. As you note, "We may never know." True, but if so, perhaps we should avoid side-stepping the issue by blaming a dead culture and looking for clues from this particular case.
Just a thought.

Anonymous said...

It's interesting to watch this group psychology still at work even in this bad market. The group psychology is at work "Well I have lost a bunch of money but no biggie, everyone is losing money even guys like Buffet" and the psychology of greed is still fully in play "Keep investing, don't pull out or you will miss the big rally".

The horrible truth may be that the entire market is just one big legalized Ponzi scheme.