Les Cahiers de Recherche - HEC Paris
Information, trust and the limits of “intelligent accountability” in investment decision making: insights from the Madoff case
(), Richard Baker, Thomas Jeanjean and Martin Messner
Abstract: In this paper, we use the investment fraud of Bernard
Madoff to inquire into the possibilities and limits of an “intelligent
accountability” in the context of financial decision making. Drawing
primarily upon data related to U.S. Individual investors (interviews and
letters), we investigate the role of information and trust in investment
decisions. We find that trust played an important role in the Madoff case.
We also find that, in face-to-face encounters with the investors, Madoff
successfully created a “transfer of accountability” by invoking the
existence of institutional-based controls. The written account statements
that Madoff sent to investors created an “illusion of transparency” and
comforted investors by showing them how well their investments were
performing. Our findings suggest that information and different forms of
trust may interact to prevent intelligent accountability. Moreover, even if
improvements in existing mechanisms of accountability are possible, it is
unlikely that these mechanisms will provide investors with sufficient
protection against fraud or misbehavior. Our analysis thus suggests that
the most effective solution to this problem may involve reliance on some
basic rules regarding verification, diversification and self-imposed
restrictions against certain types of investments.
Keywords: trust; financial decision making; madoff case; (follow links to similar papers)
43 pages, September 17, 2011
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