>With the largest Ponzi scheme in history ($50 billion!!) still unfolding, and savvy investors caught off guard, everyone is asking how can this happen—how can smart, experienced investors be so gullible and make such big mistakes with their savings?
To me the question is important from an enterprise architecture perspective, because EA is seeks to help organizations and people make better decisions and not get roped into decision-making by gut, intuition, politics, or subjective management whim. Are there lessons to be learned from this huge and embarrassing Ponzi scheme that can shed light on how people get suckered in and make the wrong decision?
The Wall Street Journal, 3-4 January, has a fascinating article called the “Anatomy of Gullibility,” written by one of the Madoff investors who lost 30% of their retirement savings in the fund.
Point #1—Poor decision-making is not limited to investing. “Financial scams are just one of the many forms of human gullibility—along with war (the Trojan Horse), politics (WMD in Iraq), relationships (sexual seduction), pathological science [people are tricked into false results]…and medical fads.”
Point #2—Foolish decisions are made despite information to the contrary (i.e. warning signs). “A foolish (or stupid) act is one in which someone goes ahead with a socially or physically risky behavior in spit of danger signs or unresolved questions.
Point #3—There are at least four contributors to making bad decisions.
- SITUATION—There has to be a event that requires a choice (i.e. a decision point). “Every gullible act occurs when an individual is presented with a social challenge that he has to solve.” In the enterprise, there are situations (economic, political, social, legal, personal…) that necessitate decision-making every day.
- COGNITION—Decision-making requires cognition, whether sound or unsound. “Gullibility can be considered a form of stupidity, so it is safe to assume deficiencies in knowledge and/or clear thinking are implicated.” In the organization and personally, we need lots of good useful and usable information to make sound decisions. In the organization, enterprise architecture is a critical framework, process, and repository for the strategic information to aid cognitive decision-making processes.
- PERSONALITY—People and their decisions are influenced positively or negatively by others (this includes the social affect…are you following the “in-crowd”.) “The key to survival in a world filled with fakers…or unintended misleaders…is to know when to be trusting and when not to be.” In an organization and in our personal lives, we need to surround ourselves with those who can be trusted to be provide sound advice and guidance and genuinely look after our interests.
- EMOTION—As humans, we are not purely rational beings, we are swayed by feelings (including fear, greed, compassion, love, hate, joy, anger…). “Emotion enters into virtually every gullible act.” While, we can never remove emotion, nor is it even desirable to do this, from the decision-making process, we do need to identify the emotional aspects and put them into perspective. For example, the enterprise may feel threatened and competitive in the marketplace and feel a need to make a big technological investment; however, those feelings should be tempered by an objective business case including cost-benefit analysis, analysis of alternatives, risk determination, and so forth.
Hopefully, by better understanding the components of decision-making and what makes us as humans gullible and prone to mistakes, we can better structure our decision-making processes to enable more objective, better vetted, far-sighted and sound decisions in the future.