Information, trust and the limits of “intelligent accountability” in investment decision making: insights from the Madoff case

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.