The three key psychological hacks financial fraudsters deploy.
Not for them the glinting knife in some dark back alley. The tools of their trade are Savile Row suits and exclusive golf club membership. As we saw in the case of Bernie Madoff.
He defrauded thousands of investors out of tens of billions of dollars over the course of at least 17 years. How did he do it? By hiding his fraudulent activities in plain sight. By joining the finest golf clubs, by being seen at all the right charity high society parties, by becoming Chairman of NASDAQ. He consistently returned 1-1.2% month on month, year on year for decades. Too good to be true? You bet!
Madoff deployed three key psychological hacks: greed; not wanting to appear ignorant; and wanting to belong.
He appealed to greed, not obscene greed such that people would disbelieve him, but a low level, steady, gateway greed – returns of between 1 and 1.2% per month, year on year on year on year. And, really, no one achieves that over a sustained period of time unless they are a vanishingly rare genius or, more likely, they are fraudsters.
He spun in lots of references to clever derivative products that he used, blinding people by science. No one wants to admit that they don’t understand something, further, investors never want to look too closely at the golden goose, so it seems that nobody questioned him in great detail, certainly not enough to expose his fraud. And then there was the third thing: exclusivity, membership of a club for the rich and well-connected. Madoff would not allow anyone to invest in his fund with less than a $1 million stake. It was reassuringly expensive to people used to inhabiting this high-stakes world.
He exploited these three things, and parlayed them with his dark, corrupt alchemy into a billionaire’s life of high living until inevitably it all came crashing down.
To read more about the fraud perpetrated in the world of high finance and how to protect yourself against it, pre-order my book, 10 Things Everyone Needs to Know About Money, here.