Ponzi Schemes & Ego

“The first product of self-knowledge is humility.” – Flannery O’Connor

By the end of the Civil War, Ulysses S. Grant and William Tecumseh Sherman were two of the most respected men in America. They were the architects of the Union’s victory over the Confederate army. However, after the war, they took very different paths. Both were asked to run for public office following their success in the war, but Sherman declined on a number of occasions and retired to a life of relative calm and happiness.

Grant, on the other hand, couldn’t resist the pull of politics and it led to his undoing. Ryan Holiday explains in his book, Ego is the Enemy:

Grant, who had expressed almost no prior interest in politics, and, in fact, had succeeded as a general precisely because he didn’t know how to play politics, chose instead to pursue the highest office in the land: the presidency. Elected by a landslide, he then presided over one of the most corrupt, contentious, and least effective administrations in American history. A genuinely good and loyal individual, he was not cut out for the dirty world of Washington, and it made quick work of him. He left office a maligned and controversial figure after two exhausting terms, almost surprised by how poorly it had gone.

After the presidency, Grant invested almost every penny he had to create a financial brokerage house with a controversial investor named Ferdinand Ward. Ward, a Bernie Madoff of his day, turned it into a Ponzi scheme, and publicly bankrupted Grant. As Sherman wrote with sympathy and understanding of his friend, Grant had “aimed to rival the millionaires, who would have given their all to have won any of his battles.” Grant had accomplished so much, but to him, it wasn’t enough. He couldn’t decide what was important— what actually mattered— to him.

The politicians and wealthy elite of his day were all jealous of Grant’s success on the battlefield, but he was just as jealous of their political power and wealth. Ego left a proud war hero nearly penniless when he died. I think the polar opposite of ego is contentment and it seems that Grant just couldn’t find his own contentment in life after the war.

Ego can come from a number of sources — overconfidence, hubris, pride, arrogance and a lack of self-awareness. It can also lead to your downfall by increasing your blind spots, especially when you’re an expert in any field.

My favorite example of this (which I included in my book) is the story of Stephen Greenspan. Greenspan is a psychologist whose research focuses on gullibility and human fallibility. In December of 2008, he released a book that included all of his findings on our human failings called Annals of Gullibility: Why We Get Duped and How to Avoid It. 

That very same month was when Bernie Madoff’s $65 billion Ponzi scheme finally unraveled and came to light after years of lies and deception. Here’s the kicker — Greenspan himself was a Madoff investor. The guy who literally wrote the book on gullibility was duped in the largest Ponzi scheme of all-time.

He was a good sport about it all and even wrote a story in the Wall Street Journal to explain where he went astray and share some lessons learned:

In my own case, the decision to invest in the Rye fund (a feeder fund invested with Madoff) reflected both my profound ignorance of finance and my somewhat lazy unwillingness to remedy that ignorance. To get around my lack of financial knowledge and my lazy cognitive style around finance, I had come up with the heuristic (or mental shorthand) of identifying more financially knowledgeable advisers and trusting in their judgment and recommendations. This heuristic had worked for me in the past and I had no reason to doubt that it would work for me in this case.

My belief in the wisdom of this course of action was so strong that when a skeptical (and financially savvy) friend back in Colorado warned me against the investment, I chalked the warning up to his sometime tendency towards knee-jerk cynicism.

Both Grant and Greenspan failed to have a clear understanding of what they were getting themselves into. They ventured outside of their circle of competence and it cost them dearly.

I’m always amazed at how often it is I read about another new Ponzi scheme in the news. It’s a regular reminder of the Dunning-Kruger effect. Some people just cannot accept or recognize that there are certain areas of life where they lack the competence or expertise to be successful. We make it a habit of allowing our own egos to overwhelm any mounting evidence of our own ignorance.

People hate to admit that they don’t know everything. That they have more to learn in this life. Or see others succeeding where they aren’t. We have a hard time imagining how we could be wrong or seeking out the advice of others who may tell us things we don’t want to hear.

It’s not always easy, so I’m constantly trying to remind myself how much I don’t know and still have to learn.

Richard Feynman once said, “The first principle is that you must not fool yourself – and you are the easiest person to fool.”

This is why ego can be so self-destructive. We often don’t even realize we can end up being our own worst enemies much of the time.

Sources:
Ego is the Enemy
Why We Keep Falling For Financial Scams (WSJ)

Further Reading:
The Personal Success Equation

Now here’s what I’ve been reading this week:

 

 

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  • sportsguy

    My ego downfall has come from extrapolating success in one profession / industry into another unrelated profession / industry. Tough lesson to learn, but one built from success and the eternal sports belief that you have to have in yourself first to win. I have seen this human foible by others many times as well. The best rule of thumb for this is “Seek to understand first” and there is a great video on this from a very unlikely source, Empathy: The Human Connection to Patient Care https://www.youtube.com/watch?v=cDDWvj_q-o8
    Great article Ben

    • Ben

      Thanks. And very nice video. Well done.

    • DCP

      Thanks SG for the empathy video, truly well done.

      And thanks to Ben for noting the importance of contentment. In Paul’s words, “godliness with contentment is great gain” 1 Timothy 6:6 And in the very next verse, he basically reminds us that as far as worldly stuff is concerned, “you can’t take it with you”

  • ScrewTrump

    With Greenspan I don’t see ego as the problem. I see his problem coming from putting his trust in others, in fields he had no knowledge. Don’t most of us do this with financial advisors, doctors, lawyers, CPA’s, even car mechanics? Who has the time or inclination to become more versed in everything we might need?

    • Ben

      I have no problem in outsourcing to experts. But my main thing is you can never outsource your understanding of your own finances. So the ego thing here was assuming he was vetting his advisors correctly, when obviously that wasn’t the case.

  • How about:

    Some people just cannot accept or recognize that there are certain areas of life where charlatans intentionally create situations where one’s lack of competence or expertise is specifically exploited and is contrary to their own best interest.

    • Ben

      True. Works beyond finance as well, but some people just want to believe they’re the exception and not the rule in these cases.

  • Sleege

    Ben! The Dunning-Kruger Effect! This is the second time in the last week that I’ve read about the Dunning-Kruger Effect. I first came across this term while reading the comments on a very funny (but sad?!) Youtube video where a fellow is doing his best to sing (link can be found here: https://youtu.be/b6WAcdY4yrU). Where there are people, the Dunning-Kruger Effect will be present.

    Now when it comes to deception, I’d say there is one fraud that tops the Ponzi Scheme – and that is the product-based pyramid scheme (aka Multi-level Marketing/Network Marketing). I’ve come across at least a dozen of these companies in 2016. Here’s to people making better financial decisions in 2017! Thanks for the high quality reading material and life advice Ben!

    • Ben

      Good stuff – thanks for sharing. Happy new year

  • This happens with fitness, too: just think of the “fat-busting” ab workout devices and OTC diet pills that are supposed to get around the hard work of disciplined exercise and dieting.

    Medicine, too, with vitamin and similar regimens designed to “cure” serious disease.

    What these have in common with finance is the stakes are high and the technical complexity of the field surpasses the interpretive capabilities of the average person.

    Nick de Peyster
    http://undervaluedstocks.info/