The New Clarion

Regarding the Madoff scandal, Chuck writes:

“I can’t help thinking how similar it is to the characters who invested with the “playboy” version of Francisco D’Anconia, because he “knew how to make money.”  They did no research into the actual projects they were investing in. “

The Wall Street Journal recently ran an interesting article by Mark Penn & E. Kinney Zalesne that attempted to explain this phenomenon.   While I am not familiar with and thus do not have an opinion about Penn & Zalesne’s theory of “micro-trends,”  I do think they make several astute observations.

Penn & Zalesne take the view that, in today’s world

“rational, informed behavior is spreading through the better-educated lower and middle classes — those who went to college, have information-economy jobs, and use the Internet. But at the same time, the elites have become more impressionable — more removed from everyday problems, more trusting of what they hear, and more likely to adopt unthinking viewpoints based on brand or emotion.”

In other words,  the elites tend to be less in touch with and less capable of dealing with reality.  I think there are a few reasons for this which help explain why Madoff’s particular clientele was especially vulnerable. 

Despite the fact that we live in a society where wealth and success is still, for the most part, based on merit and achievement,  it is entirely possible for a person to become extremely rich and successful honestly and through his own efforts and yet be utterly clueless about the nature and source of wealth and, yes, even be hopelessly neurotic and/or irrational. 

An extreme and classic example of this is a Hollywood celebrity.   Somebody  (I forget who, unfortunately) once made an observation that Hollywood celebrities are nothing special – as a group they are no different than the kids you knew from your high school’s drama department except that, unlike your classmates, they just happened to pursue that interest and become one of the very few who made it in a profession where success means wealth and fame.  

I am not suggesting that Hollywood celebrities have not earned their wealth or are somehow not deserving of it.   All I am suggesting is that, had they chosen instead to become successful in some other profession, they might very well have worked ten times as hard and been ten times as virtuous in every way possible and yet lead a life of obscurity and financial struggle. Your level of  fame and financial status relative to somebody else’s is not determined merely by how intelligent or hard working you are but also by how much the marketplace values the things you happen to pursue and be good at verses things that other people pursue.  

Thus a physically attractive neurotic with a flair for the dramatic can become a world famous movie star and a thug with a moron level IQ can become a famous athlete and, by virtue of the one and only thing in this world they happen to be good at, achieve more wealth and career success than an entire army of their moral and intellectual betters could ever hope to. 

Such people are examples of what I call being wealthy in spite of one’s self.   Obviously people who inherit large fortunes fall into that category as well.  It can also happen on a more modest level.   For example,  a somewhat mediocre fellow with family connections who pursues a career in law can usually go further in terms of achieving wealth and high position than someone who is his moral and intellectual superior in every way but happens to be passionate about teaching grade school.

For some people, becoming wealthy in spite of themselves can be an extremely destructive experience precisely because such wealth can, at least temporarily, insulate them from reality and shield them from the negative consequences of their whims and various forms of neurotic, dysfunctional and irrational behavior.   We have all read stories of extremely successful celebrities who tragically crash and burn.   And if you ever find yourself stuck someplace with nothing to do, an amusing mind game you can play to pass the time is to imagine what would play out if various dysfunctional people you are acquainted with were to suddenly come into a fortune. 

People who live in more modest circumstances do not have the luxury of being insulated from and putting off the eventual consequences of irrational behavior.  It does not take long for reality to slap them in the face and force them to seriously confront important issues.   They do not have the ability to simply write a check and make all things unpleasant magically disappear.   People such as Michael Jackson or Britney Spears who do not become rich and famous will probably still be utterly neurotic.  But economic necessity provides a powerful incentive for them to find ways to function around their neurosis or else they will end up on the streets or worse.  For such people, wealth, fame and universal adoration only fuels their dysfunctional personalities  and becomes like crack with an ending that is usually a tragic freak show.

Of course, not all people who are wealthy in spite of themselves are self-destructive or irrational.    A great many are perfectly virtuous and many fully recognize that much of their wealth was achieved largely due to happy circumstances or having become successful in the right field of endeavor at the right time.   Responsible athletes and Hollywood stars grounded in reality understand, for example, that they are in professions where success is fleeting and seek to make arrangements for their wealth to last beyond their careers.   

The problem for such people is that, despite their enormous wealth,  most of them probably have no more, and perhaps even less, knowledge about how to properly manage their money than does the average intelligent person of more modest means. 

Penn & Zalesne write:

“But our research shows that the top 1% is heavily swayed by gut and impression, not numbers and facts. They vote more on the basis of personality in campaigns; buy products more on the basis of brands; and invest more on the basis of the tip than on sound logic. Who else would pay a premium for jungle-ready vehicles to run the rugged terrains of Scarsdale and Georgetown? Or shop at doggy bakeries for their pampered pooches?”

In other words, such people are more likely to make important decisions based on their emotions.    This would certainly explain why wealthy in spite of themselves elitists tend to be Leftists.   The successful middle-class tends to lean heavily to the Right on economic issues because their circumstances force them to confront and deal with the facts of reality on a daily basis and they can clearly see the havoc that the policies of the Left will wreck on their lives if implemented.  The environmental agenda, for example, is a disaster for the middle class who suffer mightily as the price of transportation, shelter, food and energy are needlessly and artificially forced upwards.  Not so for Leftist elitists who are financially insulated from such consequences and, indeed, having bought into emotion driven agendas, are already  throwing their money down the drain for their Prius cars, “green” houses, carbon offset purchases and overpriced “organics” at places such as Whole Foods.  Having more wealth than they know what to do with, they can throw it at such things for the purpose of maintaining their fantasy of moral virtue and elitist superiority.  And when they angrily demand that everybody else do likewise, they genuinely have little grasp as to how economically wasteful such things are and of the fact that they are beyond the means of most people. 

As for the doggie bakeries and pampered pooches, there is an old saying: easy come, easy go.  Managing a large amount of money is a tremendous responsibility and, unfortunately, many who end up with large amounts of money are ill prepared in terms of background and specialized knowledge to take on such a responsibility.   Thus they buy into the exact same notions and misconceptions about wealth and the wealthy spread by the pop culture that envious and unaccomplished poor people tend to hold.   Our pop culture celebrates high profile, irresponsible, spendthrift behavior and adherence to the latest fashions and trends as being somehow glamorous.  Our pop culture holds people who live such a lifestyle up as being more sophisticated and more virtuous in every way over the unwashed rabble who drink the sort of coffee served in truck stops and gas stations.  People of modest means who have self-esteem and are grounded in reality can easily see through such nonsense.  But a great many people who find themselves with more money than they know what to do with buy into such a lifestyle and its notions about their alleged superiority over the unwashed rabble. They are merely following the pop culture template of how affluent people are supposed to behave.   This is why members of the trendy,  Leftist, self-proclaimed “creative class” are so annoyingly self-righteous, arrogant and condescending.  They are no longer grounded in reality.  They live in a fantasy universe where adherence to whatever others deem to be chic and the approval of the trendy becomes the metaphysically given that they seek to conform to.

Penn & Zalesne write:

“Elites are on information and time-management overload, and the result is that they have been making big decisions with less information, not more. They throw their hands up in the face of adversity and complexity, relying upon the judgment of others instead of forming their own.”

In some ways, I am actually quite sympathetic with this.   If I were to suddenly come into a huge fortune tomorrow, I would be utterly clueless as to what to do with it.   My very first task after perhaps spending a very tiny portion of it on a celebratory luxury would be take time off from everything else in my life and make a full-time job of figuring out what on earth I should do with it and what I wish to do with the rest of my life given the suddenly expanded range of that which is open to me.  For me, it would be a full-time job to educate myself to the point where I could responsibly form my own judgments on how to manage the money.   But what if the source of my wealth was a demanding  full-time career that I was already engaged in but which had very little do to with building wealth per se?   Without the time and interest to become expert on investing, I would have to rely on the advice of competent experts.   Finding such experts, especially when the stakes are high and one knows that there are shysters out there, can be profoundly stressful.

I myself have been the victim of a few shysters.  A few years ago, I had a very painful toothache and ended up taking a dentist at her word and forked over $5,000 for two root canals and three crowns. Today, I know I vastly overpaid and question how much of that work I even needed at all.   Unfortunately, I was in excruciating pain and taking even a day to locate another dentist to see me at the last moment for a second opinion was not a viable option.  After all was done, the dentist scheduled me back for another appointment and claimed that almost every tooth in my head needed a crown or a root canal and gave me an estimate of an additional $15,000 to fix the rest.  By this time,  I was becoming suspicious and never showed for the appointment.  I eventually went to another dentist who told me I only needed a couple of fillings and I was able to take care of everything for less than $400.    I was also on the receiving end of a mechanic who deliberately sabotaged perfectly good parts on my car in order to turn a routine front end alignment into an expensive repair bill.    

Because of experiences like this, I become extremely stressed out almost to the point of paralysis whenever I need emergency services from people such as mechanics, plumbers and dentists that I have no previous experience with and had to locate at the last minute.  Because it is an emergency, there is little opportunity to get a second opinion – and because of my lack of specialized knowledge about such fields – I fully realize that I am vulnerable to being taken advantage of.   

I  suspect that many affluent people find themselves in a similar position when it comes to finding someone to manage their money.   The wealthy are constantly pestered by all sorts of sales people trying to promote investments of all kinds and they realize that some of them are probably scam artists.  But how does one differentiate between a competent advisor and a scam artist?  How does one find a good dentist or a good mechanic and learn which ones  to avoid without enduring the negative experiences I went through?   One asks around and seeks referrals from friends and colleagues who have used such services.   One of the reasons that Madoff’s scam worked is it preyed on people who attempted to do exactly that. Many knew that they were in over their head and they did not even know how to properly seek out rational advice and guidance.  For this reason, I am open to the possibility that at least some of Madoff’s victims were done in more by honest ignorance and the intellectual paralysis than by the motives of those wiped out by Francisco D’Anconia.

Ultimately, all of us end up having to turn to and rely on the advice of specialists and experts at various points in our lives.   When it comes to seeking financial advice, the wealthier one is the higher the stakes and the greater the need for that advice to be sound and to be scrutinized by one’s own independent judgment.    The difficulty for many affluent people is that their life experience and background often does not make them any more prepared to make such judgments than people  who live in very modest circumstances.

The article points out:

“So now these same elites…are going to have to look at the numbers again. They can’t just put their money in mysterious hedge funds and bigger houses and wait for manna to drop from the sky. They are going to have to start balancing their checkbooks, managing their healthcare costs and setting a monthly budget that they actually meet. Looking at greatly diminished assets and futures, these elites might just be shocked into reading the fine print on what they buy, or demanding detailed statements every month that they open and read….

Maybe people will start ordering up mini SOX audits of their own finances, catching those repeating credit card subscriptions that go on their credit cards for things they have not used in years; demanding that each and every fund they invest in meet strict new criteria. They might even ask elite colleges to justify $50,000 a year in tuition for little personalized instruction.”

In other words, they have been slapped down by reality which is now forcing them to discover responsible behaviors that most of us take for granted as a matter of common sense.   Adhering to and being confident in the face of the facts of reality is a lot easier when one has never had the “luxury” of being insulated from them.