3 ms·

How Madoff Made People Look Dumb

42 points by peter123 18y ago

peter123 18y ago
the same psychology that's the downfall of some VC investments.
gojomo 18y ago
The accounts managed by Bernard L. Madoff Investment Securities LLC reported gains of roughly 1% a month like clockwork, with nary a loss, for two decades. Why did that freakishly smooth return not set off alarms among current and prospective investors? I wonder, is anyone running Benford's Law [1] analysis on whatever meager reported details are available from other firms like Madoff's? [1] http://en.wikipedia.org/wiki/Benford's_law http://en.wikipedia.org/wiki/Benford's_law
- bstadil 18y ago
  The number 1 as in 1 percent is the least suspicious number, so Benford's law is unlikely to help.
  - byrneseyeview 18y ago
    If they average around 1%, that would mean as many .7s as .3s -- very suspicious!
    - byrneseyeview 18y ago
      Please disregard this comment, which was idiotic.
  - reitzensteinm 18y ago
    You can still work with the rest of the digits in the percentage (eg 1.1% should be more likely than 1.9%), I imagine the problem isn't the numbers themselves but the lack of a decent sized sample. You only get 12 numbers for a year and that's plenty of time to lose your shirt to a con man who has your money!
- jimbokun 18y ago
  Never heard of this before now, but seems like you should be able to leverage Benford's law somehow as a way to win lots of bar bets.
graemep 18y ago
The problem with funds is that there is no useful way to analyse them. Past performance bears very little relation to future performance, so picking a fund tends to depend on liking the manager. Very touch to make impartial judgements.
yters 18y ago
Nice writing. Here's a very clever turn of phrase that both summarizes the article while tying in the opening: "If you invest with anyone who claims never to lose money, reports amazingly smooth returns, will not explain his strategy, refuses to disclose basic information or discuss potential risks, you're not sophisticated. You're an oxymoron."
mattmcknight 18y ago
Cialdini's "Influence" is a great work. It's great at exposing a lot of sales techniques, but I had this weird feeling while reading it that it could be used as an instruction manual. Haven't read his new one yet, but it looks like an instruction manual. http://www.amazon.com/Yes-Scientifically-Proven-Ways-Persuasive/dp/1416570969 http://www.amazon.com/Yes-Scientifically-Proven-Ways-Persuas...
- gruseom 18y ago
  Yes, it's such a great book that I feel compelled to order the new one, despite the fact that Cialdini appears to have farmed out the writing to others and to have descended into self-parody in the video on that Amazon page.
gruseom 18y ago
Josh Marshall makes an interesting point: put me down as suspicious [...] that the difference between Madoff's and the other investment implosions we've seen over recent months will turn out to be so clearly one of kind rather than degree. http://www.talkingpointsmemo.com/archives/248051.php http://www.talkingpointsmemo.com/archives/248051.php It's only because Madoff made such blunt descriptions of his own scam that he's being covered as a crook. Had he done the more usual thing and insisted on obfuscation to the bitter end, the media would be putting him in the same category as all the rest. "It's all so complicated, impossible to get your head around, blah blah blah."
hualibaobao 18y ago
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42 points by peter123 18y ago

the same psychology that's the downfall of some VC investments.

The accounts managed by Bernard L. Madoff Investment Securities LLC reported gains of roughly 1% a month like clockwork, with nary a loss, for two decades. Why did that freakishly smooth return not set off alarms among current and prospective investors? I wonder, is anyone running Benford's Law [1] analysis on whatever meager reported details are available from other firms like Madoff's? [1] http://en.wikipedia.org/wiki/Benford's_law http://en.wikipedia.org/wiki/Benford's_law

bstadil 18y ago
The number 1 as in 1 percent is the least suspicious number, so Benford's law is unlikely to help.
- byrneseyeview 18y ago
  If they average around 1%, that would mean as many .7s as .3s -- very suspicious!
  - byrneseyeview 18y ago
    Please disregard this comment, which was idiotic.
- reitzensteinm 18y ago
  You can still work with the rest of the digits in the percentage (eg 1.1% should be more likely than 1.9%), I imagine the problem isn't the numbers themselves but the lack of a decent sized sample. You only get 12 numbers for a year and that's plenty of time to lose your shirt to a con man who has your money!
jimbokun 18y ago
Never heard of this before now, but seems like you should be able to leverage Benford's law somehow as a way to win lots of bar bets.

graemep 18y ago

The problem with funds is that there is no useful way to analyse them. Past performance bears very little relation to future performance, so picking a fund tends to depend on liking the manager. Very touch to make impartial judgements.

yters 18y ago

Nice writing. Here's a very clever turn of phrase that both summarizes the article while tying in the opening: "If you invest with anyone who claims never to lose money, reports amazingly smooth returns, will not explain his strategy, refuses to disclose basic information or discuss potential risks, you're not sophisticated. You're an oxymoron."

mattmcknight 18y ago

Cialdini's "Influence" is a great work. It's great at exposing a lot of sales techniques, but I had this weird feeling while reading it that it could be used as an instruction manual. Haven't read his new one yet, but it looks like an instruction manual. http://www.amazon.com/Yes-Scientifically-Proven-Ways-Persuasive/dp/1416570969 http://www.amazon.com/Yes-Scientifically-Proven-Ways-Persuas...

gruseom 18y ago
Yes, it's such a great book that I feel compelled to order the new one, despite the fact that Cialdini appears to have farmed out the writing to others and to have descended into self-parody in the video on that Amazon page.

gruseom 18y ago

Josh Marshall makes an interesting point: put me down as suspicious [...] that the difference between Madoff's and the other investment implosions we've seen over recent months will turn out to be so clearly one of kind rather than degree. http://www.talkingpointsmemo.com/archives/248051.php http://www.talkingpointsmemo.com/archives/248051.php It's only because Madoff made such blunt descriptions of his own scam that he's being covered as a crook. Had he done the more usual thing and insisted on obfuscation to the bitter end, the media would be putting him in the same category as all the rest. "It's all so complicated, impossible to get your head around, blah blah blah."

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