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.
The consummate attractor
So, how did Adolf Hitler, a deranged man with murderous intent, come to rule one of the world’s most literate and cultured countries? Didn’t his history provide some clues?
Of course it did. A quick glance at his manifesto, Mein Kampf (1925), reveals that it prefigured almost everything he said and did as führer.1 Yet even the sophisticated Jewish newspapers of 1920s Germany pretty much ignored the book. The Times of Israel recently reported:
[W]hen Mein Kampf came out for the first time, 91 years ago, German Jews hardly noticed it… [T]he Jews’ reaction to Hitler’s screed, or rather the lack thereof, …said Othmar Plöckinger, who recently published a 700-page book with many historical sources dealing with Mein Kampf, “was a kind of not wanting to waste time with such nonsense.”2
And, although Mein Kampf did not specifically discuss genocide, Lorraine Boissoneault writes in The Smithsonian that “as early as 1922, [he told] journalist Josef Hell, ‘Once I really am in power, my first and foremost task will be the annihilation of the Jews.’”3
Gladwell suggests the probable reason that Hitler succeeded in coming to power despite flashing all the warning signs of a madman was that he epitomized the mismatch between intent and presentation that characterizes bad guys. He was “a consummate attractor,” said Sir Martin Gilbert, the official biographer of Churchill. Neville Chamberlain, the British prime minister who infamously sought to appease Hitler, was not the only one fooled. Gilbert recalled that other world leaders who met Hitler, having prepared themselves for a monster, thought he was “not such a bad chap.”4
The news photo from March 21, 1933 that appears below was circulated worldwide, and shows Hitler deferring (exaggeratedly, I’d say) to Paul von Hindenburg, the taller, older, and handsomer man who would hand Hitler the reins of power, very much against his better judgment. Hitler isn’t dictating to anybody, and the pose suggests humility and supplication, not command. I’ve included the insightful caption provided by “Beachcomber,” the pseudonymous history buff who posted the photo.
Hitler bowing to Hindenburg, March 21, 1933
The lesson, says Gladwell, is that when there is a severe case of mismatch, we are easily fooled. It is part of human nature to assume that what someone is telling us is true, or at least that they believe it to be true. While assuring Chamberlain and others that he meant no harm, Hitler intended the opposite. The price the world paid was enormous and its repercussions still haunt Europe and beyond.
Some of Gladwell’s efforts to fit history to his theories, however, come up short. (That is the problem with “one explanation for everything” books.) He cites the travails of Amanda Knox, the young American who struggled – eventually successfully – for eight years to clear her name after a highly problematic murder charge in Italy, as a case of mismatch. She acted guilty, Gladwell argues, even though she was not, hence the miscarriage of justice.
I’ve only followed the case in the news media, not researched it more thoroughly as Gladwell apparently did, but he got the gist of it wrong. A good shave with Occam’s Razor – the principle that the simplest explanation for something is usually the best one – sheds some light. Knox behaved oddly, not because of her inherent “youthful American goofiness,” but because she was in shock from her roommate’s murder and terrified of being punished for a crime she did not commit. Her ability to act normally was switched off by the circumstances. And, for bored and ambitious Italian police and prosecutors, she was a prize catch: a very attractive young foreign woman – an American, yet! Most murderers are threatening-looking men; she was different.
Knox did behave a little weirdly, but that is different from “acting guilty.” People react to tragedy and the extreme stress of being a murder suspect in unpredictable ways – I know I would. She was also alleged, by police and the media, to have acted “brazen and sexual” when, Gladwell argues, she had actually been a shy misfit in high school. But Americans, garrulous and assertive by global standards, strike many people as brazen, and most 20-year-old women are interested in sex. These are not the “tells” of a murderer.
Finally, given her last name and her appearance, it would be surprising if she had not picked up the nickname Foxy Knoxy. (That she got the moniker from being a skilled middle-school soccer player, as Gladwell tells us, is a red herring, since she still bore it as an adult.) It is utterly bizarre that her nickname was taken as a sign of guilt in a murder case.
There is nothing about this case that suggests Knox was anything but an innocent victim of incompetent and possibly malicious police work. The “mismatch” between a guilty demeanor and factual innocence simply isn’t there.
What are Ross and Rachel feeling today?
Gladwell focuses in some detail on the transparency problem, the question of whether people reveal their true feelings through their body language and facial expressions. He notes that the actors in the TV series Friends are so transparent that you can usually follow the complex and silly plot twists even if you have the sound off. They are actors, not people in real life, and they are trained to translate the thoughts and feelings in the script into obvious behavioral cues. They can act out a fake smile or a real one, an affectionate hug or a romantic one, an angry or a disappointed frown, depending on what is called for.
As a result, you think you’re perceiving their true feelings. Of course, what the actors are feeling is that they’d like to go home, and are glad to be making so much money for easy work. You are mixing up the actor and his or her character, which is exactly what’s intended.
But Friends is not real life. In real life, people sometimes don’t reveal their true feelings through facial and body language. That’s why, according to a group led by the University of Chicago economist Sendhil Mullainathan, a computer makes better bail decisions than a judge.6
The computer, Gladwell explains, went through a list of 554,689 defendants in New York City, of which judges had released just over 400,000 on bail. The computer had access to the same formal information (rap sheets, demographics, and so forth) as the judges, and made
its own list of 400,000 people to release. It was a bake-off: man versus machine. Who made the best decisions? Whose list committed the fewest crimes while out on bail and was most likely to show up for their trial date? The results weren’t even close. The people on the computer’s list were 25 percent less likely to commit a crime while awaiting trial...
That’s really scary. We place our freedom, maybe even our lives, in the hands of people who are much worse at reading the landscape of human emotion and intent than a machine that can’t see, hear, empathize with, fear, or hate us and can only process highly stylized information. No wonder Amanda Knox was wrongly accused of murder.
The $50 billion con man
We now arrive at “default to truth.” The following statements are true: Bernie Madoff founded the firm that developed the technology enabling the over-the-counter “pink sheet” stock market to morph into NASDAQ. He was non-executive chairman of NASDAQ. His firm was the largest market maker on the NASDAQ and, in one particular year, was the sixth-largest market maker in the overall securities business.
Would you have believed him if he said he was also an asset management whiz whose fund delivered truly exceptional returns with very little risk? A lot of wealthy and accomplished people did, to the tune of $50 billion. The problem was that, as we all now know, it was all a scam, a Ponzi scheme. There was no fund. He paid early investors off with the money received from newer ones.
Madoff’s shenanigans were exposed when Harry Markopolos, an obscure security analyst, “couldn’t figure out what Madoff’s strategy was,” according to Gladwell. If anyone was qualified to figure it out, it was Markopolos, who had his own hedge fund and had been asked by investors to copy Madoff’s strategy so he, too, could make spectacular returns for them. Markopolos went to the SEC and to the then-prestigious prosecutor Eliot Spitzer (who later became governor of New York and resigned due to a prostitution scandal), and the mammoth scam was eventually uncovered, but not before the disbelieving SEC officials and the future governor gave him a lot of resistance.
“It [is] fun to be fooled”
I wish there were some new insight in Gladwell’s retelling of the Madoff tale, but there isn’t. It’s unsatisfying to be told that the existence of a man whose intent and demeanor didn’t match, and who could get people to believe his lies, reveals something profound about human nature that we didn’t already know. Being fooled by con men and swindlers is a recurring theme in every culture.
In fact, the momentary pleasure of being conned makes up an entire literary genre. Almost a century ago, the great New Yorker journalist Joseph Mitchell discovered a local bum with literary pretensions, Joe Gould, who told such fabulous lies and exaggerations that he became the subject of Mitchell’s best-loved articles.7 Gould said he was writing “an oral history of the world” (he later added “in our time”), which he claimed was the longest book ever written. The work was not entirely imaginary: he quoted sections of it at length. There was, however, almost no writing; it was, in fact, an oral history, resident in Gould’s head.
The poet e. e. cummings, a contemporary and neighbor of Mitchell’s and Gould’s in Greenwich Village, got wind of this and wrote a couplet that sums up Madoff’s scam better in two lines than Gladwell did in many pages:8
it may be fun to be fooled
but it’s more fun…to be little joe gould
And it was fun to be Bernie Madoff while the party lasted.
We all want to believe there is more than meets the eye. People become careless when they become believers. Madoff took advantage of that universal weakness. That’s all there is to the story, except that $50 billion is a lot more money than is usually lost when the confidence man comes to town.
The mystery of suicide
Too much of Gladwell’s book is about suicide and sexual abuse, problems that are not amenable to simple solutions. While Gladwell’s writing on these topics is competent and sensible, he imposes his communication theories on them. Doing so is more confusing than helpful.
The book is, in fact, framed by two takes – at the book’s beginning and end – on the death of Sandra Bland, a young African American motorist who killed herself a few days after being jailed for an unwarranted and illegal traffic stop. Gladwell describes the misfortune as “what happens when a society does not know how to talk to strangers.” I’d say it’s what sometimes happens when an abusive cop encounters a deeply troubled citizen; if enough such encounters take place, eventually someone will die. Some people are resilient, while others are easily pushed over the edge. Bland was the latter.
Gladwell overanalyzes the situation, finding that the policeman did “exactly what he was trained to do.” Of course, he did not intend to kill anyone (and he did not do so). But, in an escalating confrontation between a policeman and a motorist, it’s the policeman’s duty to try very hard to de-escalate. The evidence that he did so is very thin.
Gladwell also devotes close attention to the suicide, in 1963, of the 30-year-old poet Sylvia Plath, about whom much has been written already. He attributes her suicide to the “coupling” of two risk factors: lifelong suicidal tendencies, made evident by her writing and mental health history; and the easy availability of “town gas,” a carbon monoxide-heavy byproduct of coal production that was in wide use in British households of her time. (Town gas was later replaced with much safer natural gas.)
Gladwell’s argument appears to be that if it had been harder for Plath to commit suicide – if there were no town gas in her oven – she might not have done it; most suicide attempts fail. Gladwell cites as supporting evidence the fact that the overall suicide rate in Britain fell quite a bit when town gas was eliminated. The problem is that Plath was about as determined a suicide as could be imagined. She was not crying out for help; she wanted to die. And so she did.
Do poets die young?
In a related thought, Gladwell informs us that “poets die young,” and that does feel right. We think immediately of Keats and Byron, who died very young of natural causes, as well as Plath, and “Chatterton, the marvellous Boy, / The sleepless Soul that perished in his pride.”10 (The couplet is Wordsworth’s; Thomas Chatterton killed himself at 17.)
But do we have data on the average lifespans of poets, or are we engaging in availability bias because a few have died young and suicide is so shocking? It is also easy to think of poets who lived a long time: Henry Wadsworth Longfellow, Walt Whitman, and Robert Frost, the greatest American poets, come to mind. They lived to 75, 72, and 88 respectively.11 Bob Dylan is still kicking at 78.
In a review of Gladwell’s book, critic Andrew Ferguson notes that there is no occupational category in the U.S. for poets so we have no demographic data to study. Ferguson also traces Gladwell’s claim that poets commit suicide at rates “as much as five times higher than the general population” to a study of 36 British and Irish poets in the eighteenth century, of whom two killed themselves. (Chatterton was one of the two.)
Anyone who works with data even casually will see the problem: The sample is way too small, as well as being out of date. Reviewing Gladwell’s body of work, he often makes confident claims based on a thin reed of evidence.
How sexual abuse happens
Gladwell also analyzes the case of Brock Turner, the Stanford rapist. Again, I’d apply probabilistic thinking rather than miscommunication and misrepresentation. Some tiny percentage of men are rapists by temperament, and will take advantage of anyone in a vulnerable position. Most men, of course, are not, but it’s hard to tell rapists from non-rapists just by looking. If there are enough encounters between, on the one hand, a large population of men, and on the other hand a large population of women who are “so out of it [due to drinking] that she doesn’t understand what she is doing,” some women will be raped. That does not excuse the rapist at all – it is just a fact.
More interesting is the awful case of Jerry Sandusky, the Penn State coach who molested innumerable boys and young men while being lionized by a community that regarded him as a hero. Sandusky is an example of mismatch. His good deeds, which were many, were apparently a cover for his one goal, which was to have access to underage boys. His friends and associates had no way of knowing, and the instinct of his adoring public was to defend him. Many of the boys thought it was their duty to keep quiet or to pretend they liked the contact – at any rate, they were not believed, until they were.
At the risk of indulging in hyperbole, the Sandusky story is the Hitler story in miniature: consummate attractor, reportedly kind to dogs and children, widespread adulation, not such a bad chap. A recipe for disaster, if the person in question is of bad intent.
Roasted by Andrew Ferguson
Book reviewers read other reviewers are their peril. It is too easy to be influenced by a persuasive rant or rave. But the estimable Andrew Ferguson of The Atlantic, who I mentioned above, touched a nerve when he found Talking to Strangers vacuous.12 I had the same feeling – that I had read the equivalent of an initially entertaining Hollywood franchise movie that had one too many sequels. Ferguson writes,
Gladwell’s many critics often accuse him of oversimplification. Just as often, though, he acts as a great mystifier, imposing complexity on the everyday stuff of life, elevating minor wrinkles into profound conundrums. [The] pop…social science [promoted by Gladwell] specializes in taking axioms known to every 19th-century schoolteacher and duding them up as heuristics or effects or biases… Gladwell is both a sucker for and a master of this kind of obfuscation.
This critique rings true. Gladwell has promoted catchphrase-style explanations for phenomena before: we all know the “10,000-hour rule,” but we don’t know if it’s true. (If it is, there are major exceptions. Mozart started to write exceptional music before he was old enough to have done anything for 10,000 hours.) The “tipping point,” obviously not a Gladwell original but sold hard by him, has been burned into our vocabulary to the point that it sounds like ancient wisdom – which is probably is.
In Talking to Strangers, the less-than-catchy catchphrase is “default to truth.” Of course the default position when hearing something is to believe that it is true. We wouldn’t be able to function otherwise: “What time is it?” “Three-fifteen.” “Says who?”
But don’t we also know not to believe everything we hear? Aren’t we conditioned by common sense and experience, to take people’s words with a grain of salt, and to check out other evidence? If it’s obviously between nine and eleven in the morning, we’d be justified in challenging the person telling us it’s three-fifteen.
And we should be more guarded when a person is trying to sell us something or influence our behavior in an important way, especially when it comes to money. That is what most people do, whether they’ve been enlightened by Malcolm Gladwell’s advice or are simply responding to the instincts that human beings have evolved over tens of thousands of years.
Recommendations for readers
Beware of one-variable explanations. Popular science and popular psychology writers love them because they provide a convenient way of organizing a book and distinguish their work from other, similar efforts. Gladwell is prone to this tendency.
Gladwell is an entertaining and appealing fellow. At age 56 he still looks like a teenager from a distance. He knows how to give a speech. But he has a packaged style, in Ferguson’s words “introduc[ing] us to historical oddities, revisionist interpretations of the past, the frontiers of social science, the backstories behind recent headlines, all strung together along a single provocative thesis.” The fact that the style can be effective does not mean that the single thesis is right – or, if it’s right, that it is new and helpful.
An inability to see another person’s bad intentions behind their façade of honesty and benevolence is not the root of all evil. Evil is the most complex puzzle man faces: Every religion, and every irreligious philosopher, deals with it in one unsatisfactory way or another. It is the ultimate multivariate problem. After thousands of years of intense study, we do not know much about it. We should study the matter with multiple points of view, rather than accepting simple explanations.
Advice for investors
To avoid becoming a pigeon of the next Madoff, do your own due diligence. It still may not work – some risks are not preventable. But if Madoff had really been making bets of the size he claims, traders taking the other side of those bets would have surfaced. They didn’t, and that should be enough to cast suspicion. When, many years ago, a Goldman trader told me that they traded with Enron frequently and always “won,” I knew that something was rotten in the state of Enron. I did not know what, and I was not in a position to do anything about it. But I did not buy the stock.
Don’t rely on the due diligence of others. Many investors tell me that they believe a particular alternative investment is “kosher” because Harvard, Yale, or some wealthy foundation or family is participating in it. They can afford to lose a sizable chunk of their money. You can’t. If an investment doesn’t make sense to you, if there are red flags, don’t buy it.
Gladwell’s book can be summed up – maybe a little unfairly – in the great one-liner spoken by the prison warden Strother Martin in the film Cool Hand Luke: “What we've got here is failure to communicate.” Such a failure can lead to untold damage and destruction. But it is not a satisfactory single explanation for all human misery. Malcolm Gladwell comes close to saying that it is. He should try harder.
Larry Siegel is the Gary P. Brinson Director of Research for the CFA Research Foundation and an independent consultant. Prior to that, he was director of research in the investment division of the Ford Foundation. His book, Fewer, Richer, Greener will be published by Wiley in 2019. He may be reached at [email protected] and his web site.
1 http://www.greatwar.nl/books/meinkampf/meinkampf.pdf. Just finding a copy of Mein Kampf was a little unnerving. It appears in a bibliography as Hitler, A. (1925) – just like a normal person. Hitler has reached such a pinnacle in the mythology of evil that when we see his name in context of other people, in this case other authors, it seems significantly out of place.
4 Personal communication, 1996. Gilbert made these comments in an investor meeting of Cursitor-Eaton Asset Management Company at which I was present.
6 At the time he did this work, Mullainathan was at Harvard.
7 Mitchell, Joseph. “Professor Sea Gull” (1942) and “Joe Gould's Secret” (1964), in The New Yorker. Compiled in Mitchell’s  Up In the Old Hotel, New York: Penguin Random House.
8 This is part of a longer poem: http://xroads.virginia.edu/~ma05/dulis/poetry/Cummings/cummings2.html (poem 27). It was, in fact, not much fun to be Little Joe Gould when he was not wowing the literati: he spent much time in mental institutions, and medical examinations found that he had experienced intermittent starvation.
9 Source: left, https://www.biography.com/crime-figure/bernard-madoff; right, The New Yorker.
11 A lifespan of 75 or 72 was well above average in the 1800s, when Longfellow and Whitman lived. It seems youngish now. Times and medical technologies have changed.