Malcolm Gladwell on Preventing Financial Fraud … and Worse

“There’s always an easy solution to every human problem – neat, plausible and wrong.”
H.L. Mencken, in The Divine Afflatus

In his latest book, Malcolm Gladwell turns to a theme that matters greatly to financial advisors – preventing financial fraud and abuse. It is part of his broader inquiry into how we can avoid placing our trust in the wrong people.

Talking to Strangers is not about talking to strangers. It is a manual on how to avoid being victimized or bamboozled by evil, slippery, or amoral people. Well-written (Gladwell is always entertaining) and opinionated, it is an annotated compendium of case studies on how some of the world’s worst people got others – strangers – to believe their lies and get sucked into situations that range from profoundly tragic to merely unfortunate.

If you don’t talk to strangers because you’re afraid you’ll become a victim, you’ll never learn anything. Everyone except your mother was a stranger at some point in your life, and you only can learn by listening. The University of Chicago behavioral psychologist Nicholas Epley has a relevant take on talking to strangers, available here. According to Epley, talking to strangers will make you happier (that is my experience). Now, back to Gladwell, who does provide a helpful service, although not as helpful as one might want and certainly not the one advertised in the title.

The book has has considerable flaws. Like much of Gladwell’s work, it oversimplifies complex problems and overcomplicates simple ones.

Investors will be most interested in Gladwell’s recounting of how Bernie Madoff fleeced rich people and philanthropic institutions out of an astonishing $50 billion, providing a billion-dollar windfall for lawyers and misery for everyone else involved. But I’ll start with Adolf Hitler, because he continues to fascinate and horrify, and Gladwell has much to say about him.

Gladwell introduces a couple of psychosocial concepts that he finds useful in explaining the behavior revealed in his stories. One is “default to truth,” the idea that we assume, at least until we encounter contrary evidence, that what someone is telling us is true. The other is “mismatch,” a conflict between a person’s inner intentions and the way they present themselves. Hitler was a spectacular example of mismatch, in that, unless you were looking closely, his public persona seemed to belie his genocidal intent.