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Alexandra Penney is featured on CNN today.

Public reaction to her reaction to having her “life savings” wiped by the Madoff situation surprised her.

This is a great example of how the rules we all play by are specific to our own contexts/situations in life.

In reading the CNN piece and Penney’s writing you might say:

  • God, she still has a lot of money
  • Why would anyone fall for Madoff
  • Madoff isn’t in jail?!
  • Why do ponzi schemes work?
  • What a whiner
  • Madoff should rot in hell

Penney seems to be really offended. The justice seems to be really light on Madoff.  Madoff seems to have really had a lot of people who trusted him.

Our perceptions of that reality are 100% dependent on our own history.  We will almost always be surprised by others reactions in such conflicting contexts.

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The last 7 days of Internet blogging and searches have been dominated by Ponzi scheme debate and definition.

For reference, here’s Google Trends for Ponzi/Ponzi Scheme vs. Britney Spears.  I use Britney Spears as a proxy for actual volume because she’s been a top search term for 8 or 9 years.

Ponzi Searches on the Web

Ponzi Searches on the Web

On Time.com blog, Curious Capitalist, we see the commenters and the author trying to define and assign “good” and “bad” judgments to what happened with Madoff and what’s happening with Social Security.

The problem with all the debate, like many important debates, is that we’re arguing about definitions and phrasing, instead of analyzing the real issues and behavior.

Whether Madoff was running a Ponzi Scheme or whether social security is some enlightened version of one is irrelevant to what we do about the behaviors contributing to the financial mess we’re in.

In almost all the current financial situations (Social security, housing, credit slump, Madoff…), the contigency management is very inefficient.  The rewards and punishments for taking on big risk are many degrees removed from the risky behavior.  The reinforcers produced by the situations get lost in translation between computerized trading, industry memos, and the media.   We’re rewarding behaviors in one context and punishing them in another (spending without transparency – the bailout- is OK, but it isn’t OK for these businesses… which is it?)

The rules are not clear at all and so no one can play by them.

You can’t call any of this irrational either.  it’s perfectly rational to keep investing and spending when you get reinforced (returns on investment) over a long period of time.  You come to expect those returns and habituate to the risk involved in investing in companies, financial products and services that don’t have defined outcomes.  You can’t totally blame the originator of these investment vehicles either as people keep investing, further reinforcing the behavior of the originator.  (I’m simplifying a bit here).

Consider the life of Ponzi. (Find better sources than Wikipedia, but this will do for now because it’s online)  His history can be interpreted in many ways.  What strikes me is how it builds behavior by behavior.  All along the way as people wonder, they continue to make him rich, provide for him, write about him.  Even until his death he still found work, press and basically what he needed.  So, was it a character flaw in his gene code that created the great mail fraud, or was it the contingencies all along the way?

What’s to think this scenario, now played out with Paulson, Madoff, AIG… isn’t going to be played out again and again when we don’t change the environment?  The actors in this play are irrelevant pieces.  It’s the environment (the media, the surrounding people, the culture, the financial system..).

Do I have an answer? No.  You have to chip away by managing contingencies both with your own life and the wider public.  There’s no one set of rules or one policy or a perfect economic system.  We have to constantly pay attention and adjust.

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