In the aftermath of the Madoff Ponzi scheme, psychologist Stephen Greenspan writes in The Wall Street Journal on why we continuously fall for financial scams—and in the process describes the ‘anatomy’ of gullibility.
Gullibility is a sub-type of foolish action, which might be termed “induced-social.” It is induced because it always occurs in the presence of pressure or deception by one or more other people. Social foolishness can also take a non-induced form, as when someone tells a very inappropriate joke that causes a job interview or sales meeting to end unsuccessfully. Foolishness can also take a “practical” (physical) form, as when someone lights up a cigarette in a closed car with a gas can in the back seat and ends up incinerating himself. As noted, the same four factors can be used to explain all foolish acts, but in the remainder of this paper I shall use them to explain Ponzi schemes, particularly the Madoff debacle.
Greenspan’s four factors of gullibility are situation, cognition, personality and emotion.
Toward the beginning of this article Greenspan mentions the book Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, a book that Jonah Lehrer—editor at large of Seed Magazine—classes as one of the top five books on irrational decision-making. The book was first published in 1841 and is in the public domain (available from: The Gutenberg Project, The Library of Economics and Liberty).