Tuesday, January 27, 2009

Why We Keep Falling for Financial Scams - WSJ Essay


Stephen Greenspan Ph.D., a psychologist, recently wrote a book, "Annals of Gullibility" focusing on a multi-dimensional theory that attempts to explain how so many people can find themselves in situations that could have been avoided. After Dr. Greenspan wrote his book, he found that much of his retirement savings had been invested in the Rye Prime Bond Fund, part of the Tremont family funds, a subsidiary of Mass Mutual Life. Unfortunately, the Rye Prime Bond Fund was a feeder fund of Madoff's Ponzi scam.

Why We Keep Falling for Financial Scams (Stephen Greenspan, WSJ, 1/3/09)

The following is a quote from Greenspan's essay:
"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 (or mental shorthand) 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 article explores the topic in-depth.

Latest Ponzi Scheme:

Cosmo Ponzi Scheme Took in $370 Million, U.S. Says (Bob Van Voris and Patricia Hurtado, Bloomberg, 1/27/09)

Nicholas Cosmo of Agape World Inc. was accused of running a Ponzi scheme from 2003 through December 2008. He lied to his investors by telling them that the money was invested in "bridge loans". In reality, he invested in commodity futures, loosing about $80 million dollars out of an investment of $100 million.

According to the article, Cosmo was sentenced to prison in 1999 for misappropriating funds when he was a stockbroker. He also was ordered to receive therapy for a gambling problem. That information should have caused his investors to think twice before plunking down large sums of money into his scheme.
Nicholas Cosmo
Photo from Bloomberg.com

Bernie Madoff
Photo from NY Times

Perjury Charges Against Madoff? SEC Officials Believe That He Lied to Them During Past Examinations (Kara Scannell, WSJ, 1/27/09)

"Lawmakers expressed frustration at regulators' explanations for failing to catch Bernard L. Madoff's alleged multibillion-dollar fraud but drew little blood because officials declined to discuss details of the case.

Linda Thomsen, chief of the Securities and Exchange Commission's enforcement division, suggested in Tuesday's hearing at the Senate Banking Committee that federal prosecutors may pursue charges against Mr. Madoff over what they believe were his lies to SEC officials during past examinations."


Madoff's list of victims is getting longer. Alexandra Penney, the former editor of Self Magazine, gave her life savings to Madoff's firm. She has shared her experience on her blog, "The Bag Lady Papers", on The Daily Beast.


Zsa Zsa Gobor lost millions due to Madoff (Reuters, 1/24/09)

91-year old actress Zsa Zsa Gabor lost up to $10 million dollars investing in Bernie Madoff's fraudulent investment firm.

Report: Larry King the Latest Big Loser in Bernie Madoff Scandal (FoxNews.com 1/23/09)

Of Human Competence - Stephen Greenspan's Blog

Keynesian + Behavioral Finance?

Robert J Shiller: Irrational Exuberance

George A. Akerlof and Rober J. Shiller
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism

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