People, at their core, are greedy. Even when they are cautious. Scammers wouldn’t exist if this weren’t the case, they exploit people’s natural greed. Most “smart” people can root out a scam pretty easily, because most scammers share a few traits.
1) They are unknown to you
2) What they claim is simply too good to be true
Neither of these was the case with Madoff, hence he made off with a lot of money (pun intended).
In terms of #1, first off, here were reasons people believed:
1) He’d been operating this LLC since 1960
2) He was known as a very philanthropic guy (people who steal are usually not also people who give away large sums of money, at least such is the stereotype)
3) He was instrumental in founding the NASDAQ and was its director for a time…if anyone would know about investments, it would be this guy
4) He had a LOT of very high profile clients who trusted him
5) He consistently returned profits to his investors.
So, he was very much a “known” commodity. And he fostered an image of being a discriminating investor by turning some potential investors down, creating an aura of exclusivity. Again, surely if he was just out to take people, he’d take EVERYONE for a ride, not just a select group.
Then there was the second part of this equation…too good to be true. Well
1) Again, he wasn’t taking on everyone, just certain people who met his criteria
2) The proof was in the pudding, he not only had an extensive client list, but he returned profits to them again and again
3) His returns weren’t eye-popping, just better than market….where a lot of Ponzi schemes fail is they offer too high a return and thus can’t be sustained as long…he kept his returns better than market, but only modestly better.
In the eyes of the person with money to invest, the ideal would often be to find an investment opportunity which was relatively stable over a long period of time, which returned better than average for similar funds, which had a long track record. And of course, investment opportunities like this where they DO exist, are not always all that easy to buy into. Well, this just seemed to many to be a cream of the crop kind of investment opporuntity, one that had proven itself time and again, and just like any once in a lifetime opportunity, if you were accepted, you might as well go in whole hog.
It’s like when you have a kid, you’re bound to get a postcard in the mail from some place saying they’ll make your kid a model. If you go to their offices, basically they’ll flatter you and make you think that your kid has opportunities, like maybe with a particular retailer or something along those lines…they’re not promising you that your kid will be the next great child actor, but maybe you can make enough money to put your kid through college by bringing him to photo shoots for Wal-Mart ads or what not. Then at the end, they say all you need is $500 to do some head shots, which they can do right there in their studio, but if you balk, suddenly it’s a now or never situation…they only have so much time to spend with each potential new client and they’re willing to take you on and take a chance on you, but you HAVE to give them that $500 TODAY…no you can’t think about it and call them tomorrow, by then they’ll have hired someone to take that spot, this is a once in a lifetime opportunity.
The idea is, hey, I’ve got this shot at something, and it’s not unrealistic, I mean other people do it all the time and make money, I’d be a FOOL NOT to do this when you get right down to it. Just THINK of how well this could work out for ME! And this is how it works. Whether you’re talking about giving a $500 check to some guy to take some pictures of your kid in an office that will have moved locations within the next 2 weeks, or whether it’s $500 million you’re getting the best possible return on that you’re lucky to have stumbled into, because not EVERYONE is this fortunate, and you’d be foolish to pass up this opportunity that worked so well for so many others.
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