Tuesday, December 16, 2008

"Trust but Verify"

This quote is attributed to Ronald Reagan, and the context of his statement was foreign policy. But it can be applied in many contexts, and the latest notorious circumstance where the parties failed to exercise such discipline involves the investment manager Bernard L. Madoff. The context, of course, was the investment of one's money. What characterizes this scandal appears to be not only the scale of the fraud. What distinctly characterizes it is that that the people whom Madoff defrauded were those who, one would think, should have known better.

It reminds me of a scuba diving class that Walter and I attended when he was in Scouts and both of us were getting certified. It was the final classroom meeting before we went out on our culminating dive off of Islamarada. The instructors were first rate, and the handout that night was a chart that listed all of the things that could go wrong on a dive and kill you. I put up my hand and asked the main instructor how often beginners like us would find ourselves in such deadly situations.

She said very rarely. Most of the people who were killed, she said, were experienced divers who knew better than to make the mistakes described on the chart. She said that experienced divers often felt they could bend the rules and get away with it. Inexperienced, but well trained divers, she said, were usually very attentive to the rules. Furthermore, they would be on the dive and remind us.

What I think happened to the Medoff investors, people who knew the rules, was that they thought both Medoff and themselves were exceptional people, exceptional in their experience, in their intelligence, and in their social and professional standings. The red-flags of consistent investment performance above the norms, year after year, as if they and they alone lived in some alternate universe, were not for them. Those red flags were for the rest of us.

There is a Despair poster (I can't recall the name of it) that presents a sort of truth (something I call a "Despair-truth") which suggests that some people make huge mistakes as a lesson to the rest of us. So it is with those who are simply too smart, too fine, and too successful to be bothered with verification.

1 comment:

Anonymous said...

I remember that chart of all the life-threatening problems that one could encounter while scuba-diving. The chart went on for 3 pages! My instinctive reaction was to wonder why my husband and my son wanted to pursue this activity!