Thursday, September 29, 2011

Why did they give money to Madoff?

One of the simplest and most persistent questions is why investors willingly gave their money to Bernie Madoff, even though the steady returns he afforded seemed implausible when based on common investor experience. I googled the phrase “madoff magician” and came up with 575,000 entries. So the interesting question is; what is the psychological appeal of a magician?

Consider the situation in which an audience and a magician acknowledge that magic is entertainment. But what precisely is entertaining about magic? For those on the inside the pleasure is observing the magician’s skill. But for the naïve member of the audience the pleasure is in the suspension of disbelief; the giving over to the illusion and experiencing it in the moment as real. This is not as strange as it may seem, since we experience just this process when we cry at the sad endings of movies and stories. The plot and character are entirely fictional but we invest them with the very real qualities of what psychologists call our ”internal objects,” the fantasies we have of others and ourselves that populate our inner worlds and create the templates we use to interpret our lived experience. Psychologists call this “projection.”

One way to understand the appeal of magic is to consider those scientists who risked their reputation by vouching for the seemingly paranormal acts of such magicians as Uri Geller, for example his ability to bend objects by simply concentrating on them. In this way of thinking, Geller represented the possibility of manipulating an invisible world where the laws of cause and effect no longer held. What attracted scientists to Geller is the idea of his power to overcome the natural world, which after all is a close cousin of the scientist’s own wish to penetrate the mysteries of the natural world and to see beyond what the senses afford us. It is often stated that alchemy, with its avowed goal of turning lead into gold, was the basis for modern science; similarly, that mysticism and the scientific mind-set emerged together, with both promising mastery. We could say that the scientists projected into Geller their own fantasies about the chance to be powerful, as well as the wish that the slog of science might prove unnecessary.

Money has some of the features of magic, in the simple sense that through the law of compound growth one appears to get something for nothing. Asset bubbles have the same feature. The connections conspiracy theorists make between the ideas of “money,” “Satan” and “Jews,” rests on a similar logic. The creation of something out of nothing can be experienced as a paranormal process. This may be one reason that usury was outlawed in the bible; it had the feel of idolatry.  It also suggests that overall, the “culture code” for Wall Street itself is “magic,” and those who succeed in the market are “wizards,” just another word for magicians.

So many of us avoid risk in our daily lives. But this avoidance can come at a cost, as we may end up living what Thoreau called, “lives of quiet desperation.” This is one reason we are so fascinated with celebrities and why some swindlers attract investors precisely because they live and spend outrageously. They appear to be taking the risks we avoid, and their reward is omnipotence.

Madoff was no swashbuckler. Nonetheless, it is interesting that many “in the know” investors who were puzzled by Madoff’s investing success believed that he was “front-running” trades, that is, using his work as market-maker, to get a peek at trades about to be made, and trading in front of them to his benefit and the benefit of his investors.  Front running is illegal when based on private information -the orders for trades- but not when it is based on public information. It is a shadowy activity.

Risk, magic, omnipotence and the outlaw are a potent brew. By staying in the shadows and remaining cool and unavailable he only intensified the projections investors placed onto him. I want to suggest that it was the power of these projections, not their greed, that derailed people’s power of reasoning.  

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