The Real Risk In Madoff's Fraud - In this issue - Harwood Financial Group
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In this issue The Real Risk In Madoff’s Fraud The media can have a powerful influence on its audience, and more times than not, what they choose to report on does not line up with what matters most. This disconnect can pose real risk to investors. June 5, 2020 1
Disconnect 1. Heart disease kills almost a third of all
Americans but represents less than 3%
The chart below is from an article that
of media coverage.
compares the difference between causes of
death in the U.S. to what is most commonly 2. Violent deaths (terrorism, homicide, and
reported in the news1. The author’s suicide) comprise more than two-thirds
objective was to question whether there is of the media coverage but account for
a disconnect between what we see in the less than 3% of deaths.
news and what is reality. Since most of us
To understand why the media appears to
want to stay alive, a good litmus test would
be focused elsewhere, let’s analyze their
be to see if the media covers subjects that
incentives.
might help us avoid death.
One of the most fundamental economic
While there are several observations, two
principles is that we are all self-interested.
that stand out are:
We operate our lives and base our
2decisions on what will best serve us and we began talking, and I came to learn that
the people we love. Recognizing this she was just a nervous flyer.
principle is critical to understanding the
This passenger even admitted to knowing
motivations behind decisions made by
the statistics around flying. She understood
people and corporations.
the odds of bad things happening were
Within this context, the media represents a infinitesimally small, but the data provided
group of for-profit institutions that are in no comfort because of what she had been
business to make money. The bulk of their watching on the news that week.
revenues come from advertising, so they
A few days prior, Malaysian Airlines Flight
are highly incentivized to attract as many
370 disappeared over the Indian Ocean2.
eyeballs and website clicks as possible.
She had felt so badly for those families that
More viewers translate to more advertising her own kids were the only thing on her
dollars, so they need to keep their audience mind as we were landing.
hooked to prevent them from changing the
Upon deplaning and waiting for a taxi, I
channel. This is why single events like
remembered thinking how irrational it was
terrorist attacks get more airtime than heart
for this woman to panic simply because of
disease. There are just not enough twists
what she had been watching on the news.
and turns to keep people tuned in when
But I quickly felt like a hypocrite once I
compared to the aftermath of a suicide
remembered that my longstanding refusal to
bomber. Producers at large media
swim in the ocean was set in stone after
companies are not clueless to our bias for
watching Jaws as a kid.
single events, so they can use this to create
narratives that keep viewers hooked to drive Humans are emotional creatures, and no
advertising dollars. matter how hard we may try at times,
feelings get the best of us. It is why airline
The Impact revenues drop precipitously after plane
Reading this article reminded me of a flight crashes and movie theaters have so many
back in 2014 that encountered severe empty seats following terrorist attacks.
turbulence on descent to LaGuardia Airport. Despite these events being incredibly rare,
their impact can cause extreme responses.
Windy days there are more the norm than
the exception, but as the plane made its Few areas of our lives are impacted more
way to the gate, I noticed that the woman by emotions than our wallets. A prime
next to me was in tears and shaking example is the fallout from Bernie Madoff,
uncontrollably. After she calmed down a bit, who ran the largest Ponzi scheme in history.
3Most investors had no exposure to Madoff. around government buildings. It’s hard to
His clients were mostly institutions, argue these are not improvements from
celebrities, and wealthy families. Most prior policies and procedures.
people likely didn’t even know his name
Like most things in life, measured
prior to the media coverage, but the size of
responses tend to be best. The challenge
the fraud and the airtime it received caused
is that to do so requires separating logic
extreme panic.
from emotion, which is far easier said than
According to researchers at Cornell done. One effective tactic is to talk to a
University, the aftershock of Madoff's crimes confidant who is not afraid to challenge you.
caused $363 billion in withdrawals from The process of articulating feelings can
investment funds unrelated to him. The often be enough to bring us back on the
withdrawals were so hefty that some rails. It’s also better to have a close friend
investment firms went out of business3. think you are overreacting versus risking
your financial future. This is also why a nest
This happened despite the actual impact to
egg should be managed by a team rather
most investors and financial markets being
than just one person.
immaterial. He stole a few billion from the
$40 trillion in investable assets in the U.S.4, The bottom line is that the real risk in media
which is practically a rounding error. Most hype tends to be the reaction to the event
of his investors even recovered sizeable rather than the event itself. Emotions are
portions of their original investment3. viruses that infect investment strategies, so
keep a cool head the next time some crook
The irony is that while these investors
steals money or your favored presidential
sought safety and security, many of them
candidate loses.
probably missed out on the early innings of
what became one of the best decades for Sincerely,
equities in history.
The Bottom Line
Evidence clearly suggests that events
covered closely by the media can cause
Mike Sorrentino, CFA
outsized responses, but ignoring these
over-hyped stories is not the answer. Chief Investment Officer
Madoff forced investors to do better due
diligence on advisors, and terrorists taught
law enforcement the need for barriers
4mimic the performance of an index would incur fees
Sources
and expenses which would reduce returns
1 https://ourworldindata.org/does-the-news-reflect-what-we-
die-from
2 https://en.wikipedia.org/wiki/Malaysia_Airlines_Flight_370
3 https://www.businessinsider.com/bernie-madoff-ponzi-
scheme-363-billion-dollar-exodus-investment-funds-2017-7/
4 “The Future of Wealth in The United States” – Deloitte
Consulting, 2015
5 Bloomberg
Disclosures
Investment Advisory Services offered through
Harwood Advisory Group. Insurance products and
services are offered through the Harwood Insurance
Group. Harwood Advisory Group and Harwood
Insurance Group do business collectively as Harwood
Financial Group, DBA. Harwood Financial Group is
registered as an investment adviser with the SEC. The
firm only transacts business in states where it is
properly registered, or is excluded or exempted from
registration requirements. This
newsletter/commentary is a publication of Harwood
Financial Group. It should not be regarded as a
complete analysis of the subjects discussed. All
expressions of opinion reflect the judgment of the
authors as of the date of publication and are subject
to change. Securities investing involves risk, including
the potential for loss of principal. There is no
guarantee that any investment plan or strategy will be
successful. The foregoing content reflects the
opinions of Harwood Financial Group and is subject
to change at any time without notice. Content
provided herein is for informational purposes only and
should not be used or construed as investment
advice or a recommendation regarding the purchase
or sale of any security. There is no guarantee that the
statements, opinions or forecasts provided herein will
prove to be correct. Past performance may not be
indicative of future results. Indices are not available
for direct investment. Any investor who attempts to
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