Social norms govern how individuals interact with each other and with society at large. Many norms have been incorporated into legal systems but most continue to be informal conventions. A significant percentage of the population will fail to adhere to
Note to readers: In this series, we suggest worthwhile reading material on a variety of topics, not all of which are directly related to investing. Some of the articles are behind pay walls. However, it is often possible to read
“The elementary part of psychology—the psychology of misjudgment, as I call it—is a terribly important thing to learn. There are about 20 little principles. And they interact, so it gets slightly complicated. But the guts of it is unbelievably important.”
I am not alone in wondering how it could be possible for so many highly educated and wealthy individuals to fall for a scam on the staggering scale of Bernard Madoff’s ponzi scheme. How could it be that a prominent and generally well respected individual like Bernard Madoff could fool so many people for as long as he did? More importantly, how can investors avoid falling for the next scam artist? While there were certainly warning signs as well as individuals such as Harry Markopolis who warned that Madoff’s enterprise was a ponzi scheme, for some reason individuals invested with his firm did not take action. This post explains how Madoff used psychology in his favor.