Friday, February 6, 2009

Sometimes it is Too Good to be True

The list of clients whose money disappeared in the Bernie Madoff scheme was recently published. Thousands of investors, including Madoff's lawyer, are listed in the document. It's an overwhelming case of misplaced trust, the implications of which are bound to ripple extensively for some time to come.

If I'd had money to invest, I might have been convinced to do so merely on the basis of who else was already committed: Madison National Life Insurance Company, Marder Sosnick & Co, Marion Madoff, Mark Madoff, to name just a few from the M's in the list. I would have been in very good company with a lot of savvy speculators.

This illustrates the risk in trusting even someone you know. However, there were probably signs--I heard on NPR that the account statements Madoff issued made little sense. Still, he was such a solid commodity, what did that matter?

In hindsight, this not only has something to do with myopic greed, it's a problem with evaluation: putting too much stock in one source of information.

I've argued in a previous blog or two that becoming connected with a trusted individual's online network is one way to vet unknown authors with whom your contact is connected. Clearly this may not be enough to avoid the mistakes seen in the Madoff story. Evaluating other evidence remains critical, such as the clarity of statements.

In addition to investigating the author, publisher, links (all of which would have been a thumbs up in Madoff's case) and evidence (those monthly reports were problematic), I'd like to add one more: personal judgment. Don't discount intuitions when it comes to evaluation. If you've read Malcolm Gladwell's book "Blink," you'll realize how accurate first impressions often are. Snap judgments are informed by momentary clues and many times they turn out to be right. Cloudy monthly statements probably set off a lot of momentary judgments. Apparently these weren't enough.

When overlooking a 'bad feeling' about a situation, the stakes need to be considered. Most of the time we're involved in taking low stakes risks: the consequences of including information from a discredited source in one's school work are not life-threatening nor will it send creditors to your door. But there are times when you may be involved in a very high stakes gamble. In that case, it really does matter if you consider all the evidence. The higher the stakes, the more evidence you need--and not all the same type of evidence either (e.g., don't rely solely on link to results in determining the value of a source when your health relies on it).

So let me leave you with an evaluation challenge. A letter to Richard Branson complaining about the food on a Virgin Airways flight from India has been circulating for the last several weeks. Read it. Read the blog replies. What intuition do you have about this? Is the letter sincere or is it a marketing device?

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