What if your kids could avoid a kind of thinking blindness that makes smart people take bad decisions?
Meet Harry Markopolos. He’s a hedge fund manager. Picture him sitting in his plush office in Boston around the year 2000, when his boss walks in and says, “Harry, your performance this year is… it’s a bit ‘meh’. Now there’s this other guy – he runs a competing fund - and he’s absolutely smashing it. We’d like a bit of that.”
So Harry takes a look at that other fund. It’s run by a guy called Bernie Madoff - yep, that guy. And Harry says: “It took me five minutes to know it was a fraud. It took me another four hours of mathematical modelling to prove that it was a fraud.”
He sends his analysis to the regulator. One memo is titled: “The world’s biggest hedge fund is a fraud.” And what does the regulator do next?
Nothing.
And so the world’s largest Ponzi scheme continued for another eight years, until it finally collapsed destroying $65 billion and wiping out the life savings of thousands of families, charities, and institutions.
So why didn't the regulator act?
It’s not because they were lazy, stupid or corrupt. There’s no evidence of that.
They failed because of something cognitive scientists call belief perseverance, which is a term to describe when we cling to what we believe, even when the evidence against it is staring us in the face.
Madoff wasn’t just any fund manager. He was respected. Well-connected. A former chairman of NASDAQ.
And once the story of Madoff as a pillar of society was lodged in people’s minds, it became impossible to see him clearly — even when Harry’s facts were screaming.
Belief perseverance has nothing to do with intelligence. It traps experts. Regulators. All sorts of smart people.
So how to fight it?
In the next blog, I'll share you the question that one of the world's richest men asks himself as a daily habit—a habit he believes is the reason he’s been so successful.
It helps him see the world clearly when others can’t. And it's something you can teach your kids right now.
