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Let’s face it, we humans are little more than herds animals who tend to follow the flow of the tide. Don’t believe me? Then answer this. Why is it that whenever someone new enters a half-empty subway car (train car) they immediately navigate towards the crowded portion of the car where everybody else is crammed like sardines squished in a can.

So why would everybody avoid the empty portion of the car, never mind the fact that there is nothing apparently amiss to be found there?  I mean assuming there’s no unfortunate homeless person who hasn’t bathed for weeks, there’s no well-heeled drunk celebrating the latest round of Wall Street excess retching all over the place and in fact the air and temperature on that empty side of the car is precisely the same as that found on the other side where everybody is clustered like bats roosting at a roof-dangling rave!

The reason…

SOCIAL PROOF

The principle of social proof declares that people tend to base their actions to reflect the behavior of others around them. In other words we as human beings more or less act in a manner that pretty much mimic that of others around us.

Thus in the above example of the half-empty subway car, due to the herd mentality the first few people to enter the car will naturally group together. Assuming they initially collected in only one section of the subway car, from then onwards the next batch of people entering will also instinctively congregate towards that populated portion of the car.

By now even though one half of the car is pretty full while the other half is empty,  people who enter immediately and instinctively gravitate towards the packed-like-sardines section. The psychology behind this is simple; anybody who gets onto the subway car after the crowd formed in one spot immediately assumes that there must be something wrong with the other half that’s why nobody else is venturing there!

I CAN BELIEVE ANYTHING PROVIDED IT IS INCREDIBLE!

The above title is actually one in a very long string of quotes uttered by Oscar Wilde.  Between it and the principle of Social Proof they go the distance in explaining how even the smartest investors got duped and bilked of millions (if not billions) by Bernard Madoff!

In case you are not familiar with the story, Bernie “Made-Off” Madoff, formerly the trusted chairman of The NASDAQ stock exchange, was recently arrested (dec 2008) for perpetrating what is perhaps known to be the biggest Ponzi scheme in history. To wit, it is believed that the man duped investors to the tune of  $50 billion dollars! A ponzi scheme is a scam that uses money paid by later investors to pay the monies and profits due to earlier investors. This type of scam was named after its inventor Charles Ponzi who created and first used the system in the United States in 1903; a ponzi scheme is also referred to a as a pyramid scam/scheme.

Anyway Bernie Madoff did not swindle just anybody, he managed to dupe the best of the best.

THE MADOFF SWINDLE WAS A CLASSIC MARKETING SELL!

Bernard Madoff employed the very best and time honored principles of marketing to get the biggest, brightest and best of accounts to invest in his scheme.

EXCLUSIVITY: Not just anybody could invest in the Madoff Investment program, you had to have “An In” to invest your money with Bernie the Genius! Investors and financial institutions across the globe were literally falling all over themselves to get their money magically transformed into fantastic returns by Bernard Madoff. But as said before you needed to belong to an exclusive club or know somebody who knew somebody to get An In. This is a classic and very successful example of the exclusivity principle at play; the harder it is to get something the more that people want it!

EXPERT: People naturally tend to trust the advice of an expert and who could possibly be a better expert at investing than the “trusted former chairman of The Nasdaq” stock exchange? Yup…Madoff certainly had this angle covered!

TESTIMONIALS: A very important Social Proof component of the selling game, one which was brilliantly covered by Madoff without him ever having to lift a finger! The fact that his list of clients was a virtual roster of who’s who in investment circles was testimonial enough!

EVIDENCE: The issue of evidence was easily and more than adequately covered since most people were of the opinion that Madoff was obviously utilizing a revolutionary and novel system that was nothing less than the stuff of legend and genius! Madoff himself proved to clearly be an ardent devotee of the doctrine “More Mystery…Less History” and used it to the hilt to help push his program and silence skeptics and dissenters!

But the truth of the matter was the evidence he provided was the mother-of-all lies!

In fact Madoff kept two sets of accounting books, one set that told the truth (HUGE DEBT) which was for his eyes only, and the other set which he periodically presented to his investors proudly boasting exhilirating and heartwarming figures of fantastic growth and returns on their investments (which alas were as far from the truth as could be)

Orca

IN SUMMARY: The Madoff fiasco should serve as a cautionary tale to anyone active in online marketing. Just because some so-called guru touts a “magical system with apparent fantastic returns” (and backed by a who’s who of testimonials) doesn’t necessarily mean that the system really works…

…the real magic of the system is to be found in the illusion that it actually works; an aspect that is beautifully covered by correct implementation of Social Evidence, as amply illustrated in the Madoff Scam!

Article on social proof and scams written by Ba Kiwanuka