Madoff big lie theory explained in simple terms

Today, after the fact, many are falling over themselves asserting that investors in Madoff's funds should have known better than to believe such performance claims. They're right, but the more interesting question is: Why did so few actually know better in advance?

A clinical psychologist, assures me that it's because we're primarily emotional beings. We like to think of ourselves as objectively analyzing the data under the cool light of reason, but far more often than not our emotions are running the show.

It takes courage to say that the king has no clothes, especially when the king is paying you handsomely.

That's why I often tell my clients to subject their strategies and their chosen advisers to special scrutiny during those times when they are performing well. That's when we are most likely to be lulled into a dangerous complacency.

Far better to find out then than later that if something is too good to be true, it probably is.