How and Why Madoff Was Able to Trick so Many "Smart" People - How Madoff Conned his Palm Beach Socialites

As a psychiatrist and medical doctor it would be improper to diagnose Bernard Madoff without interviewing him directly and having him take various psychological tests.

However, what is not off limits and just as relevant is not what his behavior says about him, but what it says about us. What is there about human nature that makes some of the smartest and supposedly shrewdest financial minds ignore red flags and abandon judgment?

How Madoff was able to do it can be explained by social psychology and why he was able to do it can be explained by neuropsychology.

Social psychology is the study of how people and groups interact. Robert B. Cialdini is a social psychologist, Professor of Psychology at Arizona State University and author of Influence: Science and Practice. He is one of the leading researchers in the field of influence and persuasion. His work is compelling, convincing and so powerful that he vigorously decries it use in any exchange that lacks integrity and ethics. Unfortunately too often, people with impure motives have learned to apply this effective approach to their impure ends. I don't know if Madoff was a student of this approach, but his behavior indicates that he followed all of Cialdini's principles.

Cialdini's six "weapons of influence":

Reciprocation -- People tend to return a favor. Thus, Madoff's offer to clients to be part of an exclusive list of wealthy clients and institutions caused clients to be grateful for this special invitation and return the favor by investing more money than common sense would dictate.

Commitment and Consistency -- Also referred to as "confirmation bias," if people commit, orally or in writing, to an idea or goal, they are more likely to honor that commitment and be inclined to keep saying, "Yes" to reinforce their believing they have made the best judgment call to begin with. With Madoff, the more that people originally invested, the more they continued to invest and the more they invited their friends to invest. This all served to reinforce their believing they had made the best decision to begin with. Finally, this also caused people to overlook or negate any facts to the contrary and made them all too willing to take a "don't ask (Madoff), (Madoff) don't tell" position.

Social Proof -- People will do things that they see other people are doing. So when people discovered that others who they thought were smart and wise were investing, that increased their confidence that it was safe for them to do so.

Authority -- People will tend to obey authority figures, even if they are asked to perform suspicious or even objectionable acts. Madoff was a former Chairman of the NASDAQ and a philanthropist. So it was assumed that if anyone could understand the potential opportunities and risks of younger growth companies, it would be him.

Liking -- People are easily persuaded by and by from other people that they like. It was easy to confuse Madoff's sly smile as a shrewd one. Also we tend to like people who demonstrate swagger and exude confidence. They trigger swagger and confidence envy in others who would also like to possess those qualities.

Scarcity -- Perceived scarcity will generate demand. Madoff's reserving his offering for elite investors and by invitation only made more people want to be part of his exclusive club.

Neuropsychology is the applied scientific discipline that studies the structure and function of the brain related to specific psychological processes and overt behaviors and may explain why Madoff was able to trick us. One area of neuroscience that has generated a great deal of interest and study in the past two decades is the discovery of an area in the premotor and parietal cortices referred to as the mirror neuron system.

In the late 1980's this region of neurons was discovered in Macaque monkeys. These neurons which were first referred to as "monkey see, monkey do" neurons were activated when a monkey watched another monkey perform a behavior and when the first monkey performed the behavior that it saw. When the discovery was also applied to humans, the region also fired when a person imagined doing that activity in his mind's eye. So when a golfer imagines the flight of a ball before he hits it, this part of the brain actually thinks it's hitting the ball.

Further research including fMRI scans (which show what is happening to the brain as it is thinking or doing an activity) have indicated this site might be the prime location for where imitation, learning and empathy develop and when dysfunctional, a possible site that might lead to autism.

The significance of this discovery is that people not only have a reaction when they respond/react to the people around them; they also have a very positive and satisfying reaction when people are mirroring them or "getting where they're coming from." That is why many people cry and feel disarmed when someone is kind to and understands them without it being solicited.

This neurological region may be the underpinning for why Cialdini's "weapons of influence" are so powerful, i.e. applying them causes the other person to feel empathized with and understood. When people feel that way, they lower their guard and lean into the relationship and trust it more. In essence when people really feel that you get where they're coming from, they're much more likely to trust you to take them where you'd like them to go.

Just as guns do not kill people, people kill people, empathically mediated persuasion techniques do not manipulate people for evil, people do that. Hitler and Osama bin Laden were both extremely empathic in that they both knew all too well how terrorizing people can almost paralyze them with fear or at least completely disrupt their ability to function.

What it comes down to is a person's values. It's their values that determine whether they will use persuasion and empathy in the best interest of their clients (as medical doctors who are sworn to "first do no harm" do with their patients) to do good or to greedily exploit their fears, insecurities and yes, their clients' own greed to violate ethics and morality.

How can all of us use these findings from social psychology and neuropsychology to be more fortified against the charming manipulators and psychopaths in life? First, go into any meeting with any person who is pitching you knowing explicitly what you want and need from them. When you don't know these, the charm of these people can cause you to be vulnerable to their persuading you to need and want what they are offering. Second, make certain that whatever they are offering makes sense, feels right and seems actually doable. Third, realize that whatever they're offering is a good deal for them, so push them to tell you why it's a good deal for them.

Finally, be prepared to walk away, no matter what they say. If they say, "Take it or leave it," leave it. If it feels too good to be true, it is.

Mark Goulston, M.D. is a former FBI/police hostage negotiation trainer, UCLA professor and is a thought leader at Los Angeles based Ferrazzi Greenlight. Contact: mgoulston@ferrazzigreenlight.com