How Bernie Madoff Fooled Everyone w/Malcolm Gladwell | Joe Rogan

When you make the title of this book, Talking to Strangers, do you have a goal that you're trying to achieve? Are you trying to illuminate certain aspect of communication? Are you trying to highlight issues that people have had with these stories like the Michael Brown story? Yeah. I mean, I'm trying to... I wanted to start with the premise of why are we so bad at... You know, like I tell a story in a book of the Larry Nassar case at Michigan State. Which one's that? That's the guy. Remember the doctor for the gymnastics team? Oh, yes. It turns out to have been sexually molesting. Huge pedophile. Yeah, huge pedophile. So there you have a case where everyone thinks they know this guy. He's their friend. He's this gifted doctor. The parents are willingly bringing their kids to be treated by him. The parents are in the room while he is abusing their kids and they don't see it. The kids are saying something weird happened and the parents are dismissing it. So I wanted to... That's a good example of a phenomenon that I wanted to try and explain, which is how is that possible? How can we think we know someone and be so completely wrong? How can you take your kid to a doctor and think the doctor is the greatest possible doctor and in fact what he's doing is abusing your child in front of you? And that's a very similar kind of problem to Bernie Madoff. People invested their life savings with this guy. Not little old ladies in Dubuque, sophisticated, savvy, incredibly intelligent investors, handed over millions of dollars to this guy who was not even... The Madoff fraud was so outrageous he didn't even bother to... He didn't even put it in T-bills. I mean he just spent it. It was just like crazy. What's T-bills? Treasury bills. Oh. I mean he was 100% sociopath fraud. And people over the course of 20 years wrote check after check after check after check to him thinking it was this brilliant investor. It's like that's a puzzle. That's what I wanted to get at. People did recognize that something was wrong, right? There were financial analysts that were saying that this doesn't make sense. A few of them. But it's funny. My favorite story in the Madoff chapter is the greatest hedge fund in the world is Renaissance Technologies. These are the guys out in Long Island who have had like 30% returns for 25 years. They're like all PhD, AI genius, literally geniuses. And they found themselves years before Madoff was busted, they found themselves with I think $30 million in a Madoff fund because of some complicated transaction. And they're all geniuses. So they look at what Madoff's doing and they're like, I don't look good. That doesn't make any sense to me. They're like, what should we do? We have $30 million stake in a fund and we don't understand what the guy's doing. And you would think logically they would sell their stake. They don't. Because it's returning. No. In fact, it's not even returning that. Their own legit returns are twice his illegitimate returns. They actually make the point that his returns are really low for us. Like there's no reason for us to keep their money, but they don't sell. So that's what I was trying to understand. Like they can't even, you know, there's this notion I talked about in a book that's called Default to Truth, which is this idea from a researcher called Tim Levine, which is as human beings, we're trusting engines. We are evolved to give people the benefit of the doubt. And once you understand that, and why do we do that? Because it's the right move 99% of the time. Most people are being truthful. And if you have as your strategy, I'm going to believe what people say. It makes you a fantastic friend, a wonderful person to work with. It means that you can, you know, skate through the world with a minimum of fuss. If you're a, the paranoid person is a person whose life is a nightmare, right? Because they are suspicious of everything that moves. So we evolved to be trusting engines because that makes your life easier. That's the best part of human. People want to mate with you. Like if you want to talk in an evolutionary terms about who passes on their genes, nice people pass on their genes. Even the choice between having a child with a crazy suspicious paranoid person or a loving trusting person, you choose a loving trusting person 100% of the time. So multi-out times a million years of human history, you realize trusting genes beat paranoid genes every day of the week, right? So that's what we are. We're credulous by, by, by evolutionary choice. So those guys at, in the, at Renaissance, they're, they're no different. They may be smarter than the rest of us, but they're not constructed differently. Their inclination is to believe people. And I'm like, well, I don't know. Guy says he's a good investor. Me? Why not? Let's hang on to it. See what happens. Right? That's their motive. They don't, they don't, you don't get to, to run a organization as successful as Renaissance Technologies. If you're some crazy paranoid person, right? How would you even invest in anything if you were crazy in paranoid? There was a lot of people that were really intelligent that invested in Bernie Madoff's hedge fund too. Steven Spielberg was one of them. He lost a shit ton of money. Oh yeah. I mean, look at the roster list. There isn't a, you cannot point to an unsophisticated investor on the list of people who lost the most money from, every one of them is smart. That's strange. It's so great. It is crazy. Like, think about it. Like, and by the way, getting a decent return in the market is super easy. You go to Vanguard and they, you know, they'll give you the market return year in year. That's not that hard, but these people are like, they wanted to do something fancier and they, and that's what happened. Well he, when you realize what a sociopath he actually was, is in the interviews after he's caught, where he's demanding certain things and complaining about certain things. He doesn't seem to have any remorse. He wants better treatment. He wants better food. He doesn't seem to have any remorse that he's, you know, literally robbed people of their retirement. Yeah. Ruined the last part of their lives where they thought they were going to have a considerable sum of money to sit back and just enjoy their grandchildren. No, now they're broke. Now they're poor. Yeah. Now they have to figure out a way to get by and eat. He doesn't give a shit. He does. He does it. In fact, what's weird, there's so many things weird about the Madoff case. One of them is we forget that he doesn't get caught. He turns himself in. Right. And he turns himself in because, not because he's screwing up, but because he's quote unquote so good. Because remember the financial crisis hits in 2008 and his clients are losing so much money on their legit investments that they go to Madoff and say, can I have some of my money back from you? I got to pay off all the stuff I've done that has gone sour. So like in effect, no one ever caught him. He gets caught by a once in a, you know, one in a million circumstance where he's the only one making any money for his client. So they come after him. My point is, if you, if you're totally rational and you look at this, you say, here's a guy who managed to bamboozle the most sophisticated people in the world to the tune of billions of dollars for 25 years. And he gets caught because we had a once in a lifetime financial meltdown. Isn't the rational lesson of that that we should all be Bernie Madoffs? Right? It's like super easy. It's like not that hard. I could, all I have to do is, you know, he dressed really nicely. I get really nice office space on the east side of Manhattan. What did he actually do? Nothing. Really didn't invest in anything. He just moved other people's money around and he ran a Ponzi scheme. Spent a lot of it. And how does sons not catch on to this? It's a good question. Because they're not being. Well, one of them committed suicide. Right. That's right. So it's an open question of how much they do, how much anyone else knew. The older I get, the more I believe in the powers of, particularly within family denial, is something now I don't find hard to believe. So your ability, I've now heard so many stories of, you know, a parent is some kind of monster and family members just won't see it. They just can't bring themselves to go there. So did they know something? Everyone knew there was something slightly fishy in what Bernie was doing, but they never went so far as to think that he was just making it up. So they knew something was up, but they didn't know it was 100% horseshit. They thought that he was, so there were some, people thought that he actually had investments, but he was, there was a suspicion, for example, that he was front running, that because he had a larger business, sort of managing the deal flow in the NASDAQ, that he would get advanced word of where money was flowing and he would jump ahead of the queue, buy stocks before other people did and profit off the, when the stock would rise, he would just sell and profit off that difference. So there was a feeling that he had a dubious kind of illegitimate strategy that nonetheless, legitimately made him a lot of money. So people were like, well, if, as long as he can get away with it and I can profit off it, I'm fine. But the truth is he wasn't doing that at all. In truth is he was just, he was, he had his, he had some Confederate in the attic of his company essentially making up trade orders from scratch. I mean, they were just making shit up. How many people got arrested? I forget. I think they took, I can't remember the exact number I think they got. He had two Confederates, I think, who went down with him. That's it? I think that's what it was. In retrospect, it's a really, it's one of these crazy, it's one of these crazy, you would think, you know, that whole institutions would have fallen. Yes. No. Did you ever hear the conversation that he had, I believe it was recorded somehow on a phone or something or maybe it was after he was in jail where he was talking about trying to get money back from one of his biggest investors. That's a guy that had gotten like a billion dollars from him over the years. That's right. That's right. He's like, you got to give the money back. He's like, fuck you. I'm not giving you shit. And you know, there's this crazy conversation where he's basically telling this guy, look, you knew this was bullshit and you were making money off this and now, you know. Yeah. So this is like the clever. So if you think about this, that guy, I know exactly what you're talking about. So game this too. Let's do a hypothetical scenario. You have a friend who's an incredible salesman and has gone around Europe and to Saudi Arabia and raised a $20 million fund, $20 billion fund, and they're promising a 20% return a year on your investment. Right? So you give them a million, you're getting $200,000 a year back from this thing. You know it's all bullshit, but no one else does. What is the rational thing for you to do? The rational thing for you to do is to take your, on your million dollar investment, is to take the $200,000 that is made in quotation marks every year out of the fund. So you say most people, you know, when you invest in stocks, normally what you do is you check the box. I want my, I want any dividends or earnings reinvested in the fund. Don't check the box. Take the real cash. So if you're investing with this phony friend of yours for 20 years, you're going to get $200,000 a year for 20 years. That's $4 million. You will make $4 million clear of your, out of your 1 million initial investment in 20 years. Right? That's smart if you know what's going on. So that's what some people did with Madoff. They're like, yeah, I don't know what he's doing. These returns are pretty fantastic. I'm just going to take all my earnings off the table every single year. So they are the ones who, the real winners of this whole thing with those people. Yeah. Because this money's not real. That money's coming from other investors. Nothing's being made actually. What happens with them? Like if a guy does make all these millions of dollars, like that one guy. He had to, so. He had to give some of it back? Yeah. So what happens is they appoint, remember they appoint a, after the scandal breaks and Madoff is invested, they bring in a kind of supervisor, financial supervisor, who has the power to claw back winnings from money from the people who took cash off the table. But not everyone had to claw back. And the question was how far back do we go? So if you were investing, if you were investing with Madoff 25 years ago and you took 10 million off the table between 1990 and 1993, do you have to give that up too? Like it gets complicated. Also, how can you prove that he was doing the same activity back then? Exactly. Exactly. Oh. It's complicated. The conversation, I really wish I could remember where I was hearing this conversation, but somebody had recorded Madoff talking to this guy, telling him, look, you got to give that money back. Yeah. Yeah. Yeah. My Schwab fund looks better and better all the time. It's just so scary to me that finances and the stock market and all that stuff has always looked like magic. What is going on there? What are they doing? They're moving these numbers around. When you see the ticker tape roll by, what is all that? If you don't have any understanding of it, it's like a foreign language. And so you're hoping that all these geniuses can't be duped. All these people throwing their tickets up in the air and everybody that's like, buy, sell. They all know what's going on. You don't know what's going on, but hey, there's a lot of things you know that they don't know, and this is just how the world works. Turns out, no. Turns out the people that were involved in this crazy, very difficult to understand thing, didn't know it either. They barely can understand it. And this guy was just stealing money in some weird way. And if the stock market didn't crash, if we didn't have some sort of a depression, who knows how he might still be in operation today? He would still. Without the crash of 2008, there's a very, very strong possibility that Bernie Madoff would still be going gangbusters. All he has to do to keep surviving is to take in enough money to cover withdrawals. So there's some, like we say, there's some portion of people who are withdrawing their winnings. He just needs to make enough to get new, enough new money to cover the withdrawals. So he's got a $50 billion hedge fund. And let's imagine there's a billion in withdrawals coming out every year. He's got to raise a billion. Now if you're Bernie and you already have 50, it's not that hard to raise another, particularly because he had people all around the world and he was giving them these huge fees to raise money for him. So that's the other way. The people who really made money from him were the people who had, I've forgotten what it was, but you would be, say you're Joe, the financial guy in Zurich, you have a whole bunch of wealthy European clients. For every million you raise for Bernie, Bernie would let you keep, I've forgotten what it was, a hundred grand. That's a nice business. That's real money. So you just kick back 900 to Bernie and keep a hundred grand and you're free and clear. No one's clawing that back, right? Those guys got very, very, very wealthy. Oof, that's weird money. You're sitting in your house that's stealing, built. God, that's got to be strange. So what can be learned in terms of communication from the Bernie Madoff story? Well, the Bernie Madoff story and all of these stories, but this one in particular, goes to this question of we really think we're good at spotting liars and we're not. So virtually every profession that is invested in an investigation of human beings has some belief that we know how to figure out who's lying to us. And the truth is nobody does. And if someone tells you they are good at spotting liars, there's a 99% chance that they're lying. So the evidence, so you could think, if we did an experiment here where I had a hundred people parade through this office right now, the studio right now, and every one of them made a statement in front of you and someone would lie and someone would tell the truth. And I asked you, Joe, tell me who's lying and who's not. Your accuracy rate, your success rate would be 52 to 54%. In other words, slightly better than chance. You might as well flip a coin slightly better if you don't. And that's not about you. Anyone in that chair watching these people parade in front of us is going to do a slightly bit better than chance. And the reason why it's slightly better than chance is there are a small fraction of people who are such epically bad liars that there's just, we're not going to lose those people. Those are obvious.