How Madoff Made Off With Their Money

I feel for the many private investors and charities that lost fortunes. But not only will the regulatory backlash never replace what these people lost, it won't necessarily prevent it from happening again. Human greed and ego will make sure of that. No system of regulations will reform human nature.

Bernard Madoff knew what he was doing and that it was wrong and hurtful to the tune of tens of billions. So why did he do it? Two reasons: (1) to make himself wealthy, or maintain some level of wealth that he might have achieved by accident and knew he couldn't maintain on his own merits; (2) to make himself appear the great and wise "master of the universe" market wizard that some of his clients must have thought he was.

This kind of thing will never leave the markets. I would argue that markets wouldn't even exist without it. This is what behavioral finance is all about. Ever since I read about the original "market wizards" in Jack Schwager's books in the 1990's, I became fascinated with the psychology of market success and failure. I wrote about this last summer for SFO magazine in my article "The Mental Models of Financial Self-Sabotage."

So how did Madoff make off with their money? His dedication to his greed and his fantasy of being a great--and honest--market wizard was overwhelming. He couldn't bring himself to end the lie for fear of little personal things that he probably didn't enjoy--like being broke, arrested, or shamed. In the end, what he feared most grew larger every day, until the day it all came to the surface in billions of lost wealth for thousands of trusting people.

How could one man earn so much well-deserved hate, when all he wanted was to be the hero? Ahh, the mysteries of the human mind.

Kevin Cook, ONN.tv