Judgment in Managerial Decision Making, 8th Edition

CHAPTER FOUR

Bounded Awareness

Over the course of three decades, Bernard Madoff intentionally stole from his investors. In December 2008, he confessed to his crimes, and his Ponzi scheme cracked, wiping out $64.8 billion in paper profit. Madoff sold most of his investments through feeder funds—that is, other funds that either marketed their access to Madoff to potential investors or claimed they had access to some exotic investment strategy. The feeder funds often did nothing more than turn the money they collected over to Madoff. These intermediaries were extremely well paid, often earning a small percentage of the funds invested plus 20% of any investment returns. As Madoff claimed a consistent record of success, the feeder funds profited handsomely.

This chapter is not about Madoff's deeds but rather is about our amazing ability to not notice things that happen right under our noses. There is no actual investing strategy that could have produced the returns that Madoff claimed. Did the managers of the feeder funds know that Madoff was running a Ponzi scheme, or did they simply fail to notice that Madoff's performance reached a level of return and stability that was impossible? While some may have noticed (Markopolos & Casey, 2010), ample evidence suggests that many feeder funds had hints that something was wrong but lacked the motivation to see the evidence that was readily available. Beyond the managers of the feeder funds, professional investors, government regulators, and ...