Bernard Madoff Even Scammed Other Scammers

One More Reason Bernard Madoff Succeeded: Investigators Didn’t Investigate

Now that Bernard Madoff is being investigated for allegedly running the biggest ponzi scheme fraud in history, lots of people are trying to figure out how he was able to get away with it for so long.

One clue as to how he got away with it and what little oversight or critical analysis goes in to vetting major investment advisors can be found in the example of hedge fund Access International Advisors (AIA).

AIA’s founder lost $1.4 billion in client money through his investments with Bernard Madoff before commiting suicide in December.

How does a major hedge fund get tricked into losing $1.4 billion? By having an already-useless investigation and due diligence process – and then not even using it.

The AIA hedge fund had a due diligence process for vetting potential investments.  This due diligence process included handwriting analysis, also known as “graphology,” to investigate whether investment advisors were skilled and trustworthy enough to handle large investments.  However, because of Madoff’s strong reputation on Wall Street, AIA decided it didn’t need to perform its standard investigation before investing with him.

As Risk Magazine reports: “[I]t’s not even that they used graphology… in order to assess investment prospects… It’s that they didn’t even bother to use graphology when they thought someone was an nice guy. Their due diligence process was, essentially, ‘are you a decent chap? If not, do you at least write with the letters all sort of wiggly?’”

But what if they had followed their standard practice of performing handwriting analysis on Bernard Madoff?

Handwriting Analysis Is Not an Investigative Technique or a Science – It’s Pseudoscience and Fraud

Let’s be clear here: in common language there are two types of “handwriting analysis.”

The first, otherwise known as “forensic handwriting analysis,” or “questioned document examination” is a scientific discipline, used regularly in courts of law, whereby experts examine documents to detect forgeries or to try to match handwriting examples to identify people. This is a valid – though still occasionally inaccurate – profession.

Expert forgery analysis should not be confused with its insidious step-child, otherwise known as “graphology,” which is a form of pseudoscience (a practice that claims to have scientific merit, but fails to demonstrate scientific verifiability).

Graphologists claim to be able to draw conclusions about a person’s personality based on characteristics of that person’s handwriting.  Based on the size, shape, slant, loops, and compactness of one’s handwriting, “handwriting analysts” claim to know whether someone is confident, introverted, risk-taking, injured, mean, or hard-working.  Peer-reviewed studies of graphology have concluded that it lacks validity.

Yet major corporations continue to use “handwriting analysis” as part of their HR hiring practices and, as in the Bernard Madoff example, to determine whether someone can be trusted to invest billions of dollars for them.  Think of what’s happening here: a job applicant (or hedge fund manager) could be selected or rejected because her sloppy handwriting convinced a “handwriting expert” that she was an “extreme extrovert”, or a very “risk-averse” person.

Don’t believe me yet?

“Michael Shermer Explores Graphology” Videos

Watch this series of two short videos as Michael Shermer, the editor of Skeptic Magazine and author of “Why People Believe Weird Things“,  tests the abilities of a professional graphologist:

The Michael Shermer handwriting analysis investigation continues in this second short video:

Graphologists Exist Because Graphology Triggers Our Confirmation Bias

After watching these videos, I think it’s reasonable to say that you could be left unconvinced that Shermer had done a thorough job of debunking graphology. Every test subject seemed somewhat pleased with their readings, and at least one thought the reading was quite accurate.

So doesn’t that mean that graphology might actually work?

Remember the example at the beginning of the first video of the employee who was going to “blow up” because of a medical condition, and it turned out to be true?  That’s seems pretty convincing that graphology can work.

Here’s the problem with that line of thinking: The graphologists makes broad, generalized statements (”likes to do things sequentially”, “embarrassed if other people see her get emotional”, “man of action”, “learns best by reading and studying”, “not sure of his place in the world”) that could apply to just about anybody – which is why people saw accuracy even in readings about other people.  An “analysis” that tends to draw broad conclusions that are accurate for most people, isn’t really a useful analysis.

But there’s a bigger problem: The graphologist also always makes a large number of predictions, some of which were accurate, some of which were not.  The first woman in the video is told that her handwriting indicated that she grew up with an absent parent and that her mother had died.  It turned out that her father had been “absent” while she was growing up – in that he worked a lot – but that it was her father – not her mother – who was dead.  The woman interpreted the “absent parent” comment to fit the facts, and decided the other prediction was close, even though the identity of the parent wrong. [Note: A prediction of an "absent parent" is one that is vague enough to fit almost any person's childhood and a large percentage of middle-aged people will have at least one parent who has died].

Graphology “works” because of what’s called a “confirmation bias” – the tendency of people to focus on facts that confirm their predictions, and discount facts that contradict their beliefs.

This is the same method psychics use in their readings.

First, we are told to believe that the “expert” has a special skill.  Then the “expert” provides a large number of “cold” statements, which could be generally applicable to most people.  The “expert” follows with “warm” statements – specific predictions – which are altered to fit the facts (”Your mother died?” “No, it was my father.” “I knew I was seeing that a parent had died.”) The “expert” always makes sure we direct our focus on the statements that we accurate, but doesn’t mention – or changes – the predictions that were false.

My conclusions:

1. No wonder people can commit fraud for billions of dollars when prospective investors choose to skip their due diligence if someone just seems trustworthy.

2. No wonder our economy is in crisis when major American corporate hiring and investment decisions are based on the “predictive” whims of charlatans.