Fifteen months before his Ponzi scheme unraveled, Bernie Madoff made an astounding comment.
“In today’s regulatory environment, it’s virtually impossible to violate the rules,” he told an audience in 2007. “This is something the public doesn’t really understand. It’s impossible for a violation to go undetected. Certainly not for a considerable period of time.”
Fraud is complicated. The people committing it often live in such a warped world that when the rest of us question what happened – Why did they do it? How did they think they’d get away with it? – answers are elusive. Fraud’s perpetrators don’t live in reality. They can fool themselves as much as they fool others. The bigger the fraud, the truer that becomes. So of course these things don’t make any sense. You can’t apply rational analysis to irrational minds.
John Carreyrou’s book on Theranos’s downfall is one of the best tales of deception that exists. John Grisham couldn’t match it. Now that it’s founder and COO have been charged with criminal fraud, the hindsight lessons begin.
Two stick out to me.
1. Look around. There are jerks, egomaniacs, and hucksters everywhere. Many of them are good at their craft. Plan accordingly.
Psychologist Stephen Greenspan literally wrote the book on gullibility. Annals of Gullibility: Why We Get Duped and How to Avoid It was published on December 30th, 2008. Which was awkward timing, because on December 11th, 2008, Greenspan lost “a good chunk” of his life savings to Bernie Madoff.
There is so much evidence that 1) people believe what they want and need to believe, 2) rely on social proof to form opinions, 3) associate red flags with their own lack of understanding, and 4) will never truly understand what’s going on inside someone else’s head.
Identifying trust is a learned skill. But it is not realistic to assume you can size up the intentions and honorability of everyone you meet in life. Warren Buffett prides his success on his ability to measure people’s integrity. Yet his own heir apparent – who wrote a book on corporate ethics – was fired for what many (though not the SEC) considered insider trading. Most bad behavior – in the perpetrator’s mind – isn’t intentional deceit. It’s self-rationalized. So otherwise good, smart people do things to deceive those who have trusted them. Which ups the odds that you yourself will be deceived to some degree at some point in your career. Maybe often. Maybe right now. Almost certainly right now.
It’s not fatalistic or pessimistic to admit the world is full of dupers and that you, too, will be duped. It happens. The key and is situating your life to prepare for the odds of deception. A bullshit allowance. That means an intentional focus on diversification, room for error, and avoiding single points of failure, particularly for big, non-insurable risks.
2. Optimism requires a degree of believing in things you can not or have not verified.
I often think of the Wright Brothers, whose early flights were described by historian Frederick Lewis Allan:
People were so convinced that flying was impossible that most of those who saw them flying about Dayton in 1905 decided that what they had seen must be some trick without significance–somewhat as most people today would regard a demonstration of, let us say, telepathy.
The difference is that the Wright Brothers were actually flying, while Theranos’s product didn’t do what it said it could do, with demonstrations often staged.
But the paradox of breakthrough technology is that it’s a big deal because no one had thought of it before, and no one thinking of it before means that most people can’t instantly comprehend how it works. So they have to take some leap of faith on someone else’s word, or believe something that they previously thought was impossible. This is especially true for breakthroughs steeped in science that is over most people’s heads. Like flying airplanes. Or revolutionizing healthcare with a drop of blood.
Optimism requires a certain level of believing things that can’t be verified, either because you don’t have the technical skills to verify them – nobody knows everything – or because something hasn’t happened yet but you think they’ll happen in the future. Theranos is an example of the downside risk of that requirement. But no one should pretend that a lesson from its fraud is, “Only believe what you absolutely know to be true.” That’s perhaps a recipe for larger disappointment.
“Nothing is so boring as having to keep up a deception,” poet EV Lucas wrote. These things always end the way they should, and I’m sure they will be more tales to tell.