Decision-making processes and frameworks

Decision Making

Bernie Madoff ran a Ponzi scheme that eventually generated $50 billion in assets, which is an incredible figure to go unnoticed. The basic premise of the Ponzi scheme is that the funds from new investors are used to pay returns to the old investors. These alleged gains are not gains at all -- there is really no investing being done because it is new money coming into the fund that it paying these returns (Lenzner, 2008). Madoff's scheme ended up defrauding investors out of $12 billion.

The driving force for Madoff is not mystery -- greed. He committed a criminal act, did it for years, and someone with his level of knowledge and training knew that it was a criminal act. It's definitely not a question of ethical dilemma, because with illegal actions there is no ethical dilemma, at least not according to any known philosophical standard. There are, however, some interesting thought processes. A student of criminology will work with dozens of different theories about what drives people to commit criminal acts, but a student of managerial decision-making will investigate some of the underlying thought processes.

Two thought processes for evaluation are favoritism and bounded ethicality. I do not see favoritism as being a part of this. Madoff was never really in a position, with billions of assets under management, to have any personal or emotional connection to the people, even at the top of his pyramid. Even those at the top of the pyramid had been bilked in order to pay for Madoff himself. That's the thing about Ponzi schemes, the only one who isn't ripped off is the guy at the top, in this case Madoff. Favoritism would demand that Madoff played favorites with some in an unfair way, to the detriment of others, but the scheme only had one favorite and that was Madoff himself.

Bounded ethicality is a much more interesting lens from which to view the Madoff case. Bounded ethicality is the idea that people inherently struggle with seeing the ethics of situations, even when the ethics should otherwise be obvious. So cognitively, things can happen that will affect the way that people look at issues. The way a question is framed, for example, can affect the way someone views an issue from an ethical perspective (Simcoe, 2012).

The concept of bounded ethicality raises the possibility that Madoff in fact did not understand that what he was doing was unethical. As an experience hedge fund manager, a rational-thinking Madoff had all the tools to understand the ethics of what he was doing, but bounded ethicality suggests that he may have not fully been able to process the situation. One bound could be a myopic vision of his own wealth, that this was the most important thing and nothing else really needed to be taken into consideration. Another issue could well have been that he felt he was making money for the clients. A client ripped off today would be in a better position tomorrow, to earn some of those returns. Madoff therefore was unable to see the risky situation in which he was putting his clients.