"How To Make a Madoff"

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Ben Levisohn, “How To Make A Madoff“, Business Week, December 16, 2008.

You don’t have to do anything to get a Madoff. They are always with us, like the poor. The question is whether or not you will create the social structures that detect them early. In evolutionary psychology, this is called cheater detection and it makes up a major component to most primate life.

I think that the final quotation may be more interesting:

Says Marwil, who has worked on recovery at [Samuel Israel’s Bayou Hedge Fund Group, which created a dummy accounting firm to cover up trading losses]: “I don’t think you can reach a conclusion other than they are bad guys.”

Some people are just evil. Really. They are called sociopaths and if you lump in borderline personalities and psychopaths (if there is a difference between psycho- and socio- here) you end up with a number that is close to 4% of the population. Just sociopaths, according to some estimates, make up 1 in 25, but I think that the number is inflated by bad methodology. Throw in people with aggressive conduct disorder and you get some great things.

Does power corrupt? Yes. Does absolute power corrupt absolutely? Yes.

That’s why the Reformation said that Christ had three roles, not two. “Prophet, Priest and King”, said John Calvin, a triple cure.
These people will take advantage wherever they find one. Bubbles are created when the world changes, when the rules by which things have been managed are changing. The bubble burst, which reminds people to change the rules and create new social structures (often in the form of codified laws and regulations) to deal with the new problem, detecting cheaters under the new rules.

You will always have Madoffs, Dunlaps, and Skillings, You have to create systems that detect them and do something with them.

The problem is that most of the time we want them. They make “tough decisions” and get us a lot of money. So you have to craft a system of checks and balances against ourselves.

(For that matter, you will also always have Stalins, Karadžićs and Maos. These people destroyed all opposition, and lots of the rest, too. They were supremely efficient. You have to create a system that keeps them in check. It takes a total society so you can’t just introduce it, which is why democracy is not always a great idea. Hitler was elected and National Socialism was history’s most efficient form of government. Efficiency is for Stratum 3 work, not a society.)

You have to hold two mutually exclusive ideas at one time: “People are evil” and “People will rise to the occasion”. Not easy work.

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