Wanneer mooiweerspraatjies deur die waarheid blootgelê word
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Wanneer mooiweerspraatjies deur die waarheid blootgelê word… Daniel R Wessels Augustus 2012 Bang? Nee wat, my oom. Oom het niks om voor bang te wees nie. Hoe sê hulle in die Bybel? Wees nie bevrees nie. By my is Oom se R800 000 in veilige hande. Kyk my in die oë, Oom. Ontspan, oukei? Ek weet mos Oom het hard op die plaas vir die geld gewerk. Kom ek vertel Oom ’n ding: Oom se R800 000 is veiliger hier by my as in die bank. Kyk maar wat gebeur op die oomblik in Griekeland, en in Amerika. Jy kan die banke nie meer vertrou nie. En ek gee Oom amper dubbeld die rente as die bank. Binne ses maande maak ek Oom se R800 000 vir Oom meer as ’n miljoen! Waar anders gaan Oom dít kry? Ek sê altyd: As kinders van die Here mekaar die dag nie meer kan vertrou nie, wie kan dan? Daar’s baie skelms in hierdie bedryf, my oom. Oom sien self die stories in die koerante. Die ouens kom met hul slimpraatjies; dan, môre-oormôre, verdwyn hulle met die beleggers se geld – onskuldige mense soos Oom s’n. Oom weet wat met Krion gebeur het, en met Fidentia, en met Realcor. Ek is nie een van daardies nie, my oom. Ons werk net met wettige markinstrumente. Ons vat Oom se R800 000 en sit dit in ’n trust. Dan werk ons met daai geld, ons werk met daai geld. Ek het mannetjies hierso wat 24/7 voor die computers sit en die markte dophou en met daai geld werk – alles wettig. Ons het ook baie geld ingestoot in die kanolaaanleg wat hulle by Malmesbury gaan bou. Dis eintlik nog ’n geheim, maar ek kan dit maar vir Oom sê: Hulle gaan die kanola-olie met ’n pypleiding van Malmesbury af Kaap toe pomp en uitvoer. Kanola is die goud van die toekoms, my oom. BMW in Duitsland is klaar besig om ’n model te ontwikkel wat op kanola gaan loop. Hier is als, ek kan vir Oom als wys, swart op wit. Oom kan rustig teruggaan plaas toe en gaan boer; ek sal mooi na Oom se geldjies kyk. Ek gaan nie vir Oom jok nie. Dis nie altyd maklik nie. Die markte is deesdae geweldig onbestendig, geweldig. Maar ek weet waar my krag vandaan kom, Oom. Ek sê altyd: Die Here wil nie hê ons moet arm wees nie. Ek dink baie dae kyk Hy na hierdie land, en dan huil Hy oor al die armoede wat Hy sien. Ek is nie skaam om te sê ek leef goed nie. Ek het my huis teen Kanonberg, ek het my strandhuis, ek het my plaas in die Karoo, ek het my karre en my goed. Maar weet 1 Oom wat maak my die gelukkigste? Om iemand soos Oom se geldjies te vat en binne ses maande ’n miljoen daarvan te maak – dít maak my happy. Ek prys die Here daarvoor! Oom is verniet bang. As Oom dan net hier onderaan die bladsy, hiér, vir my Oom se handtekeninkie kan maak. Dit beteken maar net Oom gee toestemming dat die geld uit Oom se rekening na myne toe oorgeplaas word. Teken maar net hier. So, ja. Dankie. Oom gaan nooit spyt wees nie. Dit kan ek Oom belowe. Deur Dana Snyman, Die Burger, 10 Augustus 2012. Miskien neem dit die fyn waarnemingsvermoë en die besonderse raakvat van iemand soos ‘n Dana Snyman om dit by die publiek tuis te bring hoe maklik ‘n mens ingesuig kan raak in mooiweerspraatjies en leë beloftes terwyl nie gehoor gee word aan enkele basiese beleggingsbeginsels en gesonde verstand nie. Hy het hierdie artikel geskryf na aanleiding van die jongste, oënskynlike beleggingsskandaal waardeur wyle Herman Pretorius veral sommige vermoënde plattelandse beleggers in die Wes-Kaap geteiken het om in sy “fonds” te “belê”. Die saak het natuurlik wye mediadekking die afgelope paar weke geniet, veral oor die tragiese skietvoorval wat tot die dood van Pretorius en sy vorige sakevennoot gelei het. Intussen het vele gerugte na vore gekom wat duidelik ‘n heeltemal ander prentjie van Pretorius se doen en late skilder as wat sy beleggers vermoed het. Ongelukkig gaan die saak waarskynlik nog ‘n lang pad moet loop voordat beleggers in hierdie skema enige uitsluitsel oor hul “beleggings” gaan kry. Ek wil nie regtig oor hierdie saak ‘n stuiwer in die armbeurs gooi nie - eerstens ek het geen kennis gehad van Pretorius en sy aktiwiteite nie, en tweedens, sover my kennis strek het ek geen kliente, vriende of familie wat geld in hierdie skema belê het nie. Wat my egter interesseer is hoekom beleggers, veral diegene wat hulself vantevore miskien as bedrewe sakepersone beskou het, hoegenaamd geld in so ‘n skema sou wou belê. Dus, my redenasies wat vervolgens uiteengesit word is nie noodwendig gebaseer op eerstehandse feite nie, maar bloot logiese gevolgtrekkings vanuit mediaverslae wat in die onlangse verlede berig is. Dan ook, hierdie is nie die eerste en sekerlik ook nie die laaste skema waarin beleggers geld gaan verloor as gevolg van slenterslae nie. Breedweg beskou is dieselfde elemente waardeur niksvermoedende beleggers uitgevang word altyd teenwoordig in sulke skemas. ‘n Ooglopende rede wat dikwels voorgehou word hoekom beleggers sulke beleggings sou maak, is gierigheid (“greed”) wat opsigself onervare beleggers blind laat staar teen ooglopende beleggingsrisikos. Die rolprentvervaardiger Oliver Stone het die konsep van gierigheid in die sakewereld netjies raakgevat met sy 1987 rolprenttreffer, Wall Street, waarin 2 die hoofkarakter Gordon Gekko (gespeel deur Michael Douglas) hom as volg uitlaat om sy besigheidstransaksies te regverdig: "Greed, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit”. Laat ek dit duidelik stel: Ek het niks teen hoë-risiko beleggings solank beleggers verstaan hoë risiko is nie noodwendig gelyk aan hoë opbrengste nie, en dit kan ook geen opbrengste en kapitaal tot gevolg hê. Trouens, baie van die tegnologiese innovasies wat ons vandag as alledaags beskou, sou waarskynlik nie bestaan en ontwikkel het as private beleggers nie aanvanklik sulke projekte gefinansier het nie! Of anders gestel, almal kan nie dieselfde risikoprofiel hê nie, beleggings wat ek byvoorbeeld as te riskant beskou, is nie noodwendig “sleg” nie – miskien vir my, maar nie vir iemand met die aptyt daarvoor nie. Die primêre voorwaarde om bostaande argument geldig te maak is dat sulke beleggers die risikos werklik verstaan. Dit is een ding om oor hoë risikos te praat of te skryf, dit is heeltemal iets anders om hierdie risiko eerstehands te ervaar. Trouens, beleggers in hoë-risiko projekte besef dat die waarskynlikheid dat ‘n spesifieke projek sal slaag relatief laag is, derhalwe word hul blootstelling verkieslik versprei oor ‘n hele paar projekte in die hoop dat miskien een of twee van hierdie projekte die toets van tyd sal deurstaan. Sulke waagkapitaal beleggers besef en aanvaar dat hul beleggingskapitaal in sommige projekte bloot afgeskryf gaan word. Dus, beleggingsverliese is feitlik ‘n gegewe wanneer ‘n belegger homself op hierdie terrein begewe. Dit bring my by die tipiese profiel van beleggers in die Pretorius skema. Laat ons vir ‘n oomblik veronderstel dat dit ‘n legitieme belegging was en nie ‘n piramide of Ponzi-skema nie (eintlik behoort ons deesdae te verwys na ‘n Madoff-skema). Duidelik het baie van die beleggers nie ‘n vaagste benul gehad van die riskantheid van die belegging of hoe om ‘n oordeel oor die meriete daarvan te fel nie. Eerstens, dat minder-vermoënde afgetredenes hierin belê het grens aan ‘n verstommende gebrek aan gesonde verstand (hoe het hul gedink waar kom die hoë “rente”-opbrengste vandaan, of, wie is bereid om in hierdie tye van lae rentekoerse sulke koerse te betaal?). Of, ten beste het sulke beleggers hierdie besluite geneem om hulself uit moontlike benarde finansiële posisies te beredder, dus ‘n vorm van desperate finansiële besluitneming. Ongelukkig, ten spyte van finansiële regulasies en oënskynlike finansiële waghonde is daar eenvoudig nie die regte doepa beskikbaar om sulke dikwels desperate beleggers te verhinder om hul beleggings aan die beloftes van hoë opbrengste te onderwerp nie – dit was nog altyd so en sal altyd so bly. Verder, indien sulke beleggers deur “adviseurs”, wat van beter behoort te weet, hieroor geadviseer is, grens dit boonop aan kriminaliteit. Hopelik maak die Finansiele Dienste Raad (FSB) korte mette van sulke “adviseurs” en moet hul boet vir hul roekelose 3 aanbevelings en aandadigheid. Let wel, die FSB het die nodige magte om diegene aan die pen te laat ry. Vervolgens kom ons by die finansieel-vermoënde beleggers wat waarskynlik in beginsel bereid sou wees om hoë-risiko beleggings te maak. Indien dit waar is dat vele boere in hierdie skema belê het, moet sulke beleggers egter ‘n eenvoudige waarheid in die gesig staar – sover my kennis strek is boerdery-aktiwiteite, veral die graanbedryf, tipies ‘n hoë-risiko besigheid. Logies gewys, sulke individue behoort dus hul surplus kapitaal voortvloeiend uit boerdery juis in laer-risiko (gediversifiseerde) beleggings te plaas, waarom dit waag in “allesof-niks” tipe beleggings? Weereens, ‘n verstommende gebrek aan gesonde oordeel. Of was daar iets anders, soos ‘n geelwortel met betrekking tot inkomste- en kapitaalwinsbelasting wat die deurslag gegee het? Enige ordentlike finansiële instelling verklaar jaarliks die rente, dividende en kapitaalwinste wat in die belastingjaar ‘n belegger toegeval het. Was hierdie praktyk deel van Pretorius se modus operandi? [Terloops, sulke beleggers moet juis nou in hul spore trap, SARS mag dalk wil uitvind of enige inkomstes uit hierdie skema ooit verklaar is.] Verder, miskien is die belegging as ‘n eksklusiewe geleentheid bemark wat nie vir die massas daarbuite beskore was nie. Ons is nou maar eenmaal “suckers” as dit kom by oënskynlike voorkeurbehandeling. Die werklike vraag hoekom ek nou juis hierdie voorkeur moet geniet word natuurlik nie eerlik beredeneer nie – bv. ek mag ryker wees of hoër sosiale status as sommige van my buurmense geniet, maar is ek ryker of belangriker as diegene van wie se bestaan ek nie eens bewus is nie? Ons glo maklik ons is spesiaal veral as iemand dit ons vertel, maar ‘n stewige skoot van skeptimisme in sulke vleiende praatjies sal altyd meer goed as kwaad doen. Op hierdie trant laat ek een waarheid rondom finansiële markte en beleggings met u deel: Ek hou van finansiële markte (maar nie noodwendig altyd met die uitkomste daarvan nie!) omrede dit die groot gelykmaker is – ongeag jou titel, status en kennis geniet niemand spesiale voorkeurbehandeling of opbrengste nie. Geld is geld en dit weet nie waarvandaan dit kom of waarheen dit gaan nie. Hoogmoed tesame met ‘n oormaat selfvertroue in jou eie vermoëns kom altyd tot ‘n val – trouens, dit is een van die min dinge waarop jy met redellike sekerheid ‘n weddenskap kan plaas! Les bes, al die tekens is daar dat Pretorius se skema (of minstens dele daarvan) inderdaad nie ‘n legitieme belegging was nie. Pretorius het homself as verhewe bokant die finansiële regulatoriese omgewing beskou, inderdaad het hy hom voorgedoen as ‘n privaatbelegger en nie as ‘n beleggingsbestuurder nie. Laasgenoemde, wat fondse by die publiek ontvang en bestuur, moet as sulks by die FSB geregistreer wees. Basies, as jy jou geld aan Pretorius 4 toevertrou het, het hy dit sy eie gemaak en kon hy “beleggings” as ‘n privaatbelegger maak sonder om rekenskap aan beleggers deur onafhanklike rolspelers en toesighouers te gee. Hoekom die FSB ten spyte van verskeie wenke uit vele oorde nie vroeër teen Pretorius kon optree nie, is duister. Waarskynlik het die FSB geworstel met die vraagstuk of Pretorius se aktiwiteite binne hul jurisdiksie val – privaat transaksies tussen individue word immers nie gereguleer nie. Ongelukkig bestaan daar in sommige kringe bedenkinge oor die bekwaamheid van hierdie instansie. Verder geniet sulke statutere instellings nie juis op die oomblik hoë aansien nie, byvoorbeeld in die onlangse verlede het die Minister van Behuising die Raad van Eiendomsagentskappe noodgedwonge onder administrasie geplaas nadat vele wanpraktyke en swak bestuur binne die organisasie aan die lig gekom het. Die belangrike les is dat wanneer ‘n belegger buite die grense van “normale” beleggings beweeg, die belegger nie hom of haar kan beroep op die FSB om as beskermengel op te tree nie – so ‘n persoon het immers self sy of haar handtekening, wat gepaardgaan met sekere verantwoordelikhede, op die spel geplaas om die “transaksie” te beklink. Pretorius het selfs sover gegaan om sy belegging die “Relative Value Arbitrage Fund” te noem. Daardeur wou hy beleggers om die bos lei dat sy belegging inderdaad ‘n “fonds” is wat kwansius deur bekwame mense bestuur word. Natuurlik is die nommer een vereiste dat die “fonds” by die FSB as sulks geregistreer moes wees gerieflik verswyg. Om skande by die skade te voeg was daar boonop “adviseurs” en selfs sogenaamde “fondsbestuurders” wat nie eens hierdie basiese nakomingsvereiste nagevors het alvorens van hul kliente in die “fonds” belê is nie. Moet sulke tipe mense ooit toegelaat word om die publiek oor hul beleggings te adviseer en te bestuur? Lees byvoorbeeld meer hieroor op Moneyweb wat wyd en syd oor hierdie gebeure berig het: http://www.moneyweb.co.za/mw/content/en/moneyweb-special-investigations Nog ‘n klassieke teken van Pretorius se aanslag was klaarblyklik sy ondubbelsinnige, verklaarde geloof in die Hemelse Vader en Bybelse beginsels. Ek beweeg natuurlik hier op ‘n baie gevaarlike terrein, maar ek het nog nie veel in die praktyk ervaar dat godsdienstige oorwegings en finansiële aktiwiteite noodwendig sterk met mekaar gekorreleerd is nie. Ek sê nie dat hierdie twee oorwegings onderling uitsluitend moet wees nie (m.a.w. altwee kan nie langs mekaar bestaan nie), maar eerder dat ‘n sterk klem op godsdienstige oorwegings my ‘n gevoel van ongemaklikheid besorg asof die ware finansiële feite van ‘n besigheidstransaksie iewers langs die pad verdoesel gaan raak. Dit is asof die gebreke aan die een kant met mooipraatjies aan die ander kant reggemaak kan word. Ongelukkig bestaan daar voorbeelde waar donateurs van goeie, openbare sake in die gemeenskap later aan die kaak gestel is as swendelaars – bv. dink maar aan die Fidentia skandaal wat mildelik die SA Jeugkoor geborg 5 het. Is dit werklik anders hier? Weereens ‘n gevaarlike terrein waarop ek beweeg en growwe veralgemenings kan nie gemaak word nie, maar elkeen moet dit maar vir homself uitwerk. ‘n Verdere interessante verskynsel is dat beleggers in Pretorius se skema bykans ‘n onwrikbare geloof en vertroue in hom gehad het. Hy het inderdaad die status van ‘n “goddelike wese” in sommige kringe verwerf. Beleggers het selfs passievol nuwe beleggers probeer werf – “moet nie jou tyd met die banke en ander instellings mors nie, kyk wat verdien ek op hierdie belegging, hierdie belegging is wonderlik”. Die vraag wat by my opkom is hoekom sulke beleggers selfs moeite wil doen om ander beleggers na dieselfde skema te lok (uitgesonderd finansiële insentiewe soos kommissies). Byvoorbeeld as ek ‘n belegging by ‘n “normale” fondsbestuurder sou plaas en baie goeie opbrengste behaal, gaan ek nie noodwendig uit my pad gaan om ander beleggers na hierdie belegging te lok nie. Waarom sou beleggers in Pretorius se skema dit wou doen? My antwoord hierop is dat sulke beleggers inherent onseker is oor die legimiteit van die belegging – dit is eenvoudig net te goed om waar te wees dat een persoon of instansie ten alle tye bobaas opbrengste kan oplewer – derhalwe gryp hul na “strooihalms” om hul beleggings te kan regverdig. Byvoorbeeld vergelyk u reaksie indien u vandag ‘n nuwe motor sou koop en die volgende dag twee teenstrydige artikels oor die keuse van u motor sou lees – die een baie positief en die ander baie negatief. Of u dit wil aanvaar of nie, u sal die positiewe berig gebruik om u aanvanklike besluit te regverdig terwyl die negatiewe berig geriefshalwe geïgnoreer sal word of afgemaak sal word as foutiewe beriggewing. Trouens, u sal geesdriftig u keuse kan verdedig teenoor ‘n persoon wat beide berigte bestudeer het en miskien ‘n onafhanklike, onpartydige opinie sou hê. Verder, die eerste reaksies op die Pretorius skema soos die soeklig daarop geval het en besonderhede na vore gekom het, het getoon dat van die beleggers die skuld op ander partye (soos Julian Williams – Pretorius se vorige sake-vennoot) wou plaas en nie kon aanvaar dat hul “held” dalk nie sy status werd is nie. Inteendeel, die tyd sal leer hoe die geskiedenis Pretorius se nalatenskap gaan evalueer, maar dit gaan ongetwyfeld nie meer die blinkgepoetse beeld van vroeër hê nie. Hoe maklik is dit om prooi te val vir sulke tipe beleggingsskemas? Kan dit met my gebeur – is ek immuum daarteen, selfs al het ek miskien goeie kennis van beleggings en bewus van die gevare van mooiweerspraatjies? Ongelukkig is dit makliker om in die strik te beland as wat die meeste van ons dink. Miskien word dit ten beste uitgebeeld deur die verhaal van ‘n Amerikaanse professor in sielkunde, Stephen Greenspan, ‘n jarelange navorser van “human gullibility” wat in 2009 ‘n boek oor hierdie onderwerp gepubliseer het, maar kort daarna bekend moes maak dat hy self ‘n slagoffer van die Bernard Madoff skema was! 6 Greenspan het agterna verduidelik dat sy besluit om in Madoff te belê ‘n sameloop van verskeie bydraende faktore was – byvoorbeeld persoonlike omstandighede, (gebrekkige) kennisvlakke, emosionele dimensies (“almal” belê dan hierin, dan moet dit goed wees) en persoonlikheidseienskappe (goedgelowig of skepties van aard). Hierdie faktore sal altyd in mindere of meerdere aanwesig wees wanneer beleggers ontleed waarom hulle geval het vir sulke beleggingsskemas. [Vir volledigheidshalwe het ek hierdie artikel van Stephen Greenspan aan die einde van my artikel aangeheg waarin hy in meer besonderhede verduidelik hoe hierdie faktore saamgespeel het in sy besluitneming om in Madoff te belê. Vanselfsprekend sal dieselfde faktore en omstandighede aanwesig wees by beleggers wat in Pretorius se skema belê het.] Na my mening is dit goed om ten alle tye opinies rondom groot beleggingsbesluite by onafhanklike en gekwalifiseerde persone te toets – dit sal nie veel deug om slegs na jou buurman of vriend se raad te luister nie – ongeag wat jy van so ‘n persoon dink is dit onwaarskynlik dat hulle ‘n holistiese prentjie kan vorm omrede hulle dalk die toepaslike ervaring en verwysingsveld kort om gebalanseerde menings oor beleggingsbesluite te kan vorm. Verder, pasop vir die geneigheid om slegs persone wat dalk jou mening gaan ondersteun, te nader. Ten laaste en waarskynlik die belangrikste opmerking: Die maklikste en veiligste manier om nooit in hierdie strikke van swendelaars te beland nie, is om slegs te belê in gereguleerde markinstrumente en by finansiële instansies waar onafhanlike toesighouding en waardasies van u belegging ten alle tye moet plaasvind. Indien selfs in die onwaarskynlike geval waar u ongeruimdhede met u belegging sou ervaar, het u as belegger maklik toegang om u spesifieke geval met die instansie of owerhede op te neem en waar moontlik toepaslike vergoeding vir u eis te kan ontvang. 7 Fooled by Ponzi (and Madoff) How Bernard Madoff Made Off with My Money BY STEPHEN GREENSPAN THERE ARE FEW AREAS OF FUNCTIONING where skepticism is more important than how one invests one’s life savings. Yet intelligent and educated people, some of them naïve about finance and others quite knowledgeable, have been ruined by schemes that turned out to be highly dubious and quite often fraudulent. The most dramatic example of this in American history is the recent announcement that Bernard Madoff, a highly-regarded hedge fund manager and a former president of NASDAQ, has for several years been running a very sophisticated Ponzi scheme which by his own admission has defrauded wealthy investors, charities and other funds, of at least 50 billion dollars. In my new book Annals of Gullibility1, I analyze the topic of financial scams, along with a great number of other forms of human gullibility, including war (the Trojan Horse), politics (WMDs in Iraq), relationships (sexual seduction), pathological science (cold fusion), religion (Christian Science), human services (Facilitated Communication), medical fads (homeopathy), etc. Although gullibility has long been of interest in works of fiction (Othello, Pinnochio), religious documents (Adam and Eve, Samson) and folk tales (Emperor’s New Clothes, Little Riding Hood), it has been almost completely ignored by social scientists. There have been a few books that have focused on narrow aspects of gullibility, including Charles Mackey’s classic 19th century book, Extraordinary Popular Delusion and the Madness of Crowds (most notably on investment follies such as Tulipimania, in which rich Dutch people traded their houses for one or two tulip bulbs).2 In Annals of Gullibility I propose a multidimensional theory that would explain why so many people behave in a manner which exposes them to severe and predictable risks. This includes myself — I lost a good chunk of my retirement savings to Mr. Madoff, so I know of what I write on the most personal level. Ponzi Schemes & Other Investment Manias & Frauds Although my focus here is on Ponzi schemes, I shall also briefly address the topic of investment manias (such as the dot.com bubble) and other forms of financial fraud (such as various inheritance scams). That is because they all involve exploitation of investor gullibility and can all be explained by the same theoretical framework. 8 A Ponzi scheme is a fraud where invested money is pocketed by the schemer and investors who wish to redeem their money are actually paid out of proceeds from new investors. As long as new investments are expanding at a healthy rate, the schemer is able to keep the fraud going. Once investments begin to contract, as through a run on the company, then the house of cards quickly collapses. That is what happened with the Madoff scam when too many investors — needing cash because of the general U.S. financial meltdown in late 2008 — tried to redeem their funds. Madoff could not meet these demands and the scam was exposed. The scheme gets its name from Charles Ponzi,3 an Italian immigrant to Boston, who in 1920 came up with the idea of promising huge returns (50% in 45 days) supposedly based on an arbitrage plan (buying in one market and selling in another) involving international postal reply coupons. The profits allegedly came from differences in exchange rates between the selling and the receiving country (where they could be cashed in). A craze ensued, and Ponzi pocketed many millions of dollars, most from poor and unsophisticated Italian immigrants in New England and New Jersey. The scheme collapsed when newspaper articles began to raise questions about it (pointing out, for example, that there were not nearly enough such coupons in circulation) and a run occurred. 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.”4 In Schiller’s view, all investment crazes, even ones that are not fraudulent, can be explained by this theory. Two modern examples of that phenomenon are the Japanese real estate bubble of the 1980s and the American dot.com bubble of the 1990s. Two 18th century predecessors were the Mississippi Mania in France and the South Sea Bubble in England (so much for the idea of human progress). In all of these cases, the thing that kept the mania going was the thought “when so many leading members of society believe in and seem to profit from a course of action, how can it possibly be risky or dangerous?” 9 A form of investment fraud that has structural similarities to a Ponzi scheme is an inheritance scam, in which a purported heir to a huge fortune is asking for a short-term investment in order to clear up some legal difficulties involving the inheritance. In return for this short-term investment, the investor is promised enormous returns. The best-known modern version of this fraud involves use of the internet, and is known as a “419 scam,” so named because that is the penal code number covering the scam in Nigeria, the country from which most of these internet messages originate. The 419 scam differs from a Ponzi scheme in that there is no social pressure brought by having friends who are getting rich. Instead, the only social pressure comes from an unknown correspondent, who undoubtedly is using an alias. Thus, in a 419 scam, other factors, such as psychopathology or extreme naïvete, likely explain the gullible behavior, as seen in a profile of such a highly-trusting victim, nicknamed “the perfect mark,” by Mitchell Zuckoff.5 Two historic versions of the inheritance fraud that are equal to the Madoff scandal in their widespread public success, and that relied equally on social feedback processes, occurred in France in the 1880s and 1890s, and in the American Midwest in the 1920s and 1930s. The French scam was perpetrated by a talented French hustler named Therese Humbert, who claimed to be the heir to the fortune of a rich American, Robert Henry Crawford, whose bequest reflected gratitude for her nursing him back to health after he suffered a heart attack on a train. The will had to be locked in a safe for a few years until Humbert’s youngest sister was old enough to marry one of Crawford’s nephews. In the meantime, leaders of French society were eager to get in on this deal, and their investments (including by one countess, who donated her chateau) made it possible for Humbert — who milked this thing for 20 years — to live in a high style. Success of this fraud, which in France was described as “the greatest scandal of the century” was kept going by the fact that Humbert’s father-in-law was a respected jurist and politician in France’s Third Republic and he publicly reassured investors, who included the cream of French society.6 The American version of the inheritance scam was perpetrated by a former Illinois farm boy named Oscar Hartzell. While Therese Humbert’s victims were a few dozen extremely wealthy and worldly French aristocrats, Hartzell swindled over 100,000 relatively unworldly farmers and shopkeepers throughout the American heartland. The basic claim — as described by Jay Robert Nash7 and Richard Rayner8 — was that the English seafarer, Sir Francis Drake, had died without any children, but that a will had been recently located (in one version, in a church belfry). The heir to the estate, which was now said to be worth billions (from compounding of the value of loot accumulated when Drake was a privateer plundering the Spanish Main), was a colonel Drexel Drake in London. As the colonel was about to marry his extremely wealthy niece, he wasn’t interested in the estate, which needed some adjudication, and turned his interest over to Hartzell, who now referred to himself as “Baron Buckland.” The Drake scheme became a social movement, known as “the Drakers” (later 10 changed to “the Donators”) and whole churches and groups of friends — some of whom planned to found a utopian commune with the expected proceeds — would gather to read the latest Hartzell letters from London. Hartzell was eventually indicted for fraud and brought to trial in Iowa, over great protest by his thousands of loyal investors. Rayner noted that what “had begun as a speculation had turned into a holy cause.” A Multidimensional Theory of Investment & Other Forms of Gullibility While social feedback loops are an obvious contributor to understanding the success of Ponzi and other mass financial manias, one needs to also look at factors located in the dupes themselves that might help to explain why they fell prey to the social pressure while others did not. 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.” 9 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. Social foolishness can also take a non-induced form, as when someone tells a very inappropriate joke that causes a job interview or sales meeting to end unsuccessfully. Foolishness can also take a “practical” (physical) form, as when someone lights up a cigarette in a closed car with a gas can in the back seat and ends up incinerating himself. As noted, the same four factors can be used to explain all foolish acts, but in the remainder of this paper I shall use them to explain Ponzi schemes, particularly the Madoff debacle. 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. As mentioned, I was a participant — and victim — of the Madoff scam, and have a pretty good understanding of the factors that caused me to behave foolishly. So I shall use myself as a case study to illustrate how even a well-educated (I’m a college professor) and relatively intelligent person, and an expert on gullibility and financial scams to boot, could fall prey to a hustler such as Madoff. Situations Every gullible act occurs in a particular micro-context, in which an individual is presented with a social challenge that he has to solve. In the case of a financial decision, the challenge is typically whether to agree to an investment decision that is being presented to you as benign but that may pose severe risks or otherwise not be in one’s best interest. Assuming (as with 11 the Madoff scam) that the decision to proceed would be a very risky and thus foolish act, a gullible behavior is more likely to occur if the social and other situational pressures are strong and less likely to occur if the social and other situational pressures are weak, or balanced by countervailing pressures (such as having wise heads around to warn you against taking the plunge). The Madoff scam had social feedback pressures that were very strong, almost rising to the level of the “Donators” cult around the Drake inheritance fraud. A December 15, 2008 New York Times article described how wealthy retirees in Florida joined Madoff’s country club for the sole reason of having an opportunity to meet him socially and be invited to invest directly with him.10 Most of these investors, as well as Madoff’s sales representatives, were Jewish, and it appears that the Madoff scheme was seen as a safe haven for well-off Jews to park their nest eggs. The fact that Madoff was a prominent Jewish philanthropist was undoubtedly another situational contributor, as it likely was seen as highly unlikely that such a person would be scamming fellow Jews (which included many prominent Jewish charities, some of them now forced to close their doors). A non-social situational aspect that contributed to a gullible investment decision was, paradoxically, that Madoff promised modest rather than spectacular gains. Sophisticated investors would have been highly suspicious of a promise of gains as spectacular as those promised almost 100 years earlier by Charles Ponzi. Thus, a big part of Madoff’s success came from his recognition that wealthy investors were looking for small but steady returns, high enough to be attractive but not so high as to arouse suspicion. This was certainly one of the things that attracted me to the Madoff scheme, as I was looking for a non-volatile investment that would enable me to preserve and gradually build wealth in down as well as up markets. Another situational factor that pulled me in was the fact that I, along with most Madoff investors (except for the super-rich) did not invest directly with Madoff but went through one of 15 “feeder” hedge funds that then turned all of their assets over to Madoff to manage. In fact, I am not certain if Madoff’s name was even mentioned (and certainly, I would not have recognized it) when I was considering investing in the (three billion dollar) “Rye Prime Bond Fund” that was part of the respected Tremont family of funds, which is itself a subsidiary of insurance giant Mass Mutual Life. Thus, I was dealing with some very reputable financial firms, which created the strong impression that this investment had been well-researched and posed acceptable risks. The micro social context in which I made the decision to invest in the Rye fund came about when I was visiting my sister and brother-in-law in Boca Raton, Florida and met a close friend of theirs who is a financial adviser who was authorized to sign people up to participate 12 in the Rye (Madoff-managed) fund. I genuinely liked and trusted this man, and was persuaded by his claim that he had put all of his own (very substantial) assets in the fund, and had even refinanced his house and placed all of the proceeds in the fund. I later met many friends of my sister who were participating in the fund. The very successful experience they had over a period of several years convinced me that I would be foolish not to take advantage of this opportunity. My belief in the wisdom of this course of action was so strong that when a skeptical (and financially savvy) friend back in Colorado warned me against the investment, I chalked the warning up to his sometime tendency towards knee-jerk cynicism. Cognition Gullibility can be considered a form of stupidity, so it is safe to assume that deficiencies in knowledge and/or clear thinking often are implicated in a gullible act. By terming this factor “cognition” rather than intelligence, I mean to indicate that one can have a high IQ and still prove gullible. There is a large literature, by scholars such as Michael Shermer11 and Massimo Piattelli-Palmarini12 that show how often people of average and above-average intelligence fail to use their intelligence fully or efficiently when addressing everyday decisions. Keith Stanovich makes a distinction between intelligence (the possession of cognitive schemas) and rationality (the actual application of those schemas).13 The “pump” that drives irrational decisions (many of them gullible), according to Stanovich, is the use of intuitive, impulsive and non-reflective cognitive styles, often driven by emotion. In my own case, the decision to invest in the Rye fund reflected both my profound ignorance of finance, and my somewhat lazy unwillingness to remedy that ignorance. To get around my lack of financial knowledge and my lazy cognitive style around finance, I had come up with the heuristic of identifying more financially knowledgeable advisers and trusting in their judgment and recommendations. This heuristic had worked for me in the past and I had no reason to doubt that it would work for me in this case. The real mystery in the Madoff story is not how naïve individual investors such as myself would think the investment safe, but how the risks and warning signs could have been ignored by so many financially knowledgeable people, ranging from the adviser who sold me and my sister (and himself) on the investment, to the highly compensated executives who ran the various feeder funds that kept the Madoff ship afloat. The partial answer is that Madoff’s investment algorithm (along with other aspects of his organization) was a closely guarded secret difficult to penetrate, and partly (as in all cases of gullibility) that strong affective and self-deception processes were at work. In other words, they had too good a thing going, for themselves and their clients, to entertain the idea that it might all be about to crumble. Personality 13 Gullibility is sometimes equated with trust, but the late psychologist Julian Rotter showed that not all highly trusting people are gullible.14 The key to survival in a world filled with fakers (Madoff) or unintended misleaders who were themselves gulls (my adviser and the managers of the Rye fund) is to know when to be trusting and when not to be. I happen to be a highly trusting person who also doesn’t like to say “no” (such as to a sales person who had given me an hour or two of his time). The need to be a nice guy who always says “yes” is, unfortunately, not usually a good basis for making a decision that could jeopardize one’s financial security. In my own case, trust and niceness were also accompanied by an occasional tendency towards risk-taking and impulsive decision-making, personality traits that can also get one in trouble. Emotion Emotion enters into virtually every gullible act. In the case of investment in a Ponzi scheme, the emotion that motivates gullible behavior is a strong wish to increase and protect one’s wealth. In some individuals, this undoubtedly takes the form of greed, but I think that truly greedy individuals would likely not have been interested in the slow but steady returns posted by the Madoff-run funds. I know that in my case, I was excited not by the prospect of striking it rich but by the prospect of having found an investment that promised me the opportunity to build and maintain enough wealth to have a secure and happy retirement. My sister, a big victim of the scam, put it well when she wrote that “I suppose it was greed on some level. I could have bought CDs or municipal bonds and played it safer for less returns. The problem today is there doesn’t seem to be a whole lot one can rely on, so you gravitate towards the thing that in your experience has been the safest. I know somebody who put all his money in Freddie Macs and Fannie Maes. After the fact he said he knew the government would bail them out if anything happened. Lucky or smart? He’s a retired securities attorney. I should have followed his lead, but what did I know?”15 Conclusion I suspect that one reason why psychologists and other social scientists have avoided studying gullibility is because it is affected by so many factors, and is so micro-context dependent that it is impossible to predict whether and under what circumstances a person will behave gullibly. A related problem is that the most catastrophic examples of gullibility (such as losing one’s life savings in a scam) are low frequency behaviors that may only happen once or twice in one’s lifetime. While as a rule I tend to be a skeptic about claims that seem too good to be true, the chance to invest in a Madoff-run fund was one case where a host of factors — situational, cognitive, personality and emotional — came together to cause me to put my critical faculties on the shelf. 14 Skepticism is generally discussed as protection against beliefs (UFOs) or practices (Feng Shui) that are irrational but not necessarily harmful. Occasionally, one runs across a situation where skepticism can help you to avoid a disaster as major as losing one’s life (being sucked into a crime) or one’s life savings (being suckered into a risky investment). Survival in the world requires one to be able to recognize, analyze, and escape from those highly dangerous situations. So should one feel pity or blame towards those who were insufficiently skeptical about Madoff and his scheme? A problem here is that the lie perpetrated by Madoff was not all that obvious or easy to recognize (in fact, it is very likely that Madoff’s operation was legitimate initially but took the Ponzi route when he began to suffer losses that he was too proud to acknowledge). Virtually 100% of the people who turned their hard-earned money (or charity endowments) over to Madoff would have had a good laugh if contacted by someone pitching a Nigerian inheritance investment or the chance to buy Florida swampland. Being non-gullible ultimately boils down to an ability to recognize hidden social (or in this case, economic) risks, but some risks are more hidden and, thus, trickier to recognize than others. Very few people possess the knowledge or inclination to perform an in-depth analysis of every investment opportunity they are considering. It is for this reason that we rely on others to help make such decisions, whether it be an adviser we consider competent or the fund managers who are supposed to oversee the investment. I think it would be too easy to say that a skeptical person would and should have avoided investing in a Madoff fund. The big mistake here was in throwing all caution to the wind, as in the stories of many people (some quite elderly) who invested every last dollar with Madoff or one of his feeder funds. Such blind faith in one person, or investment scheme, has something of a religious quality to it, not unlike the continued faith that many of the “Drakers” continued to have in Oscar Hartzell even after the fraudulent nature of his scheme began to become very evident. So the skeptical course of action would have been not to avoid a Madoff investment entirely but to ensure that one maintained a sufficient safety net in the event (however low a probability it might have seemed) that Madoff turned out to be not the Messiah but Satan. As I avoided drinking a full glass of Madoff Kool-aid, maybe I’m not as lacking in wisdom as I thought. Stephen Greenspan is a psychologist who is Clinical Professor of Psychiatry at the University of Colorado. His website is www.stephen-greenspan.com. References 1. Greenspan, S. 2009. Annals of Gullibility: Why We are Duped and How to Avoid it. Westport, CT: Praeger. 15 2. Mackey, C. 1841. Extraordinary Popular Delusions and the Madness of Crowds. London: Richard Bentley. 3. Zuckoff, M. 2005. Ponzi’s Scheme: The True Story of a Financial Legend. Random House: New York. 4. Schiller, R. J. 2000. Irrational Exuberance. Princeton, NJ: Princeton University Press, p. 66. 5. Zuckoff, M. 2006. “The Perfect Mark: How a Massachusetts Psychotherapist Fell for a Nigerian e-mail Scam.” New Yorker, p. 6. 6. Spurling, H. 2000. La grande Therese: The Greatest Scandal of the Century. New York: HarperCollins. 7. Nash, J. R. 1976. Hustlers and Con Men: An Anecdotal History of the Confidence Man and His Games. New York: M. Evans & Co. 8. Rayner, R. 2002. “The Admiral and the Con Man.” New Yorker, April 22 & 29, pp. 150-161. 9. Greenspan, S. 2009. “Foolish Action in Adults with Intellectual Disabilities: The Forgotten Problem of Risk-Unawareness.” In L. M. Glidden (Ed.), International Review of Research in Mental Retardation. Vol. 36 (pp. 147–194). NY: Elsevier. 10. Urbina, I. 2008. “A Palm Beach enclave stunned by an inside job. The New York Times, December 15, pp. B1, B3. 11. Shermer, M. 1997. Why People Believe Weird Things: Pseudoscience, Superstition, and Other Confusions of Our Time. New York: W.H. Freeman. 12. Piattelli-Palmarini, M. 1994. Inevitable Illusions: How Mistakes of Reason Rule Our Minds. New York: Wiley. 13. Stanovich, K. E. 1999. Who is Rational? Studies of Individual Differences in Reasoning. Mahwah, NJ: Erlbaum. 14. Rotter, J. B. 1980. “Interpersonal Trust, Trustworthiness and Gullibility.” American Psychologist, 35, 1–7. 15. Zitrin, P. S. 2008. E-mail communication. Boca Raton, FL, December 15. 16
