Question: What does Blind Spots tell us about the Madoff scandal?
Max Bazerman: When we look at this story, pretty clear data and courts of law have determined that Madoff acted in both illegal but also in unethical ways, and it’s pretty clear that he had a good idea of the illegal and unethical actions that he was taking. From the perspective of Blind Spots, however, a far more interesting group of people to think about in the Madoff scandal are the feeder funds, the organizations out there that were selling investors basically the opportunity to invest in Madoff’s funds. And many of these feeder funds had employees with substantial financial knowledge, very smart people, very talented people, who somehow just didn’t notice that Madoff’s returns were impossible under any reasonable set of financial assumptions.
So Blind Spots is interested in how do we not notice? How do we not see the data? And what we believe is going on is that when people have a motivated desire to not notice--and in the case of the feeder funds they were making tremendous amounts of money by selling Madoff’s investments--, we have an enormous ability to not see data that in retrospect was obvious and we should have become aware of.
Question: What should the feeder fund managers have noticed? What should they have done?
Max Bazerman: When the data is too good to be true it certainly deserves an extra look, and we have repeated cases where that simply doesn’t occur. So in the Madoff story, I believe it’s the responsibility of people with substantial financial skills to take a look at the consistency of the returns of the Madoff funds and to have noticed that this is not conceivable. There were warning bells that went off. Harry Markopolos has written a book about warning the SEC, but the SEC, the feeder funds and the investors themselves, many of whom were very sophisticated individuals, just simply didn’t notice. And when the warning bells go off that’s time to basically take another look.