Wednesday, November 09, 2005

 

Why Do Multi-Millionaires Commit Fraud?

A writer tries to understand what happened to Refco. "The recent collapse of Refco, a large US-based broker in the commodities and derivatives market, has some very interesting features for students of behavioural finance. In parallel with Enron, WorldCom and umpteen other companies, it is the top executives, whose compensations run into tens of millions of dollars, who seem to be perpetrating the biggest frauds."

"What is the motivation? Surely, by almost any yardstick, the fraudulent behaviour should be considered as irrational? Do the risks taken justify the rewards, which, in any case, are not required for any conceivable need of the perpetrator? While one can surely understand why hundreds of people looted shops during the flooding of New Orleans, it is much more difficult to make sense of the misdeeds of top executives."

And, if man is not rational, what happens to the massive body of economic theory based on the assumption of rational behaviour?

Comments:
Short answer: Because they can.

Short answer #2: Because the risks they take are orders of magnitude lower, on a dollar-for-dollar (and on a count-for-count) basis than those taken by a poorer man who steals a car.

When I was a kid, I used to wonder why people whose every conceivable need would be met far into the future would even bother with purely financial pursuits. One day, the scales fell: they do it for their egos. The rich often lose all connection to the world of needs and scarcity inhabited by the rest of us, and it becomes just a game to them.

Nothing they do with money can be rational in a personal sense because money is meaningless to them, or, at the very least, it means something very different than it does to everyone else.

That's why I am in favor of confiscatory income taxes above, say, $1M/year, and a return to the days of real inheritance taxes.
 
David,
Thanks for writing. I have often wondered why wealthy people would want to do something like, be the governor of California. I would be more accepting of yearning for power than ego, but they are closely related.
 
Because they are "M"illionaires, and want to be "B"illionaires. You have to spend some time among the big money to appreciate how bougouise a "millionaire " is perceived on Wall Street. Just about everyone has at least enough to claim "M" status- the real game is to get in the "B" status.

Someone once said that "Behind every great fortune is a great crime". While I am far from a socialist, there is often a grain of truth in that.

Ben, Keep up the alternate threads: If Gresham's Law (good vs. bad money)starts to crush the dollar, all hell will break loose.
 
My buddy knew Ted Turner. Before he got in with Time/ viacom thing. He was wealthy ,and successful beyond imagination yet he yearned to be the "richest man in the world" ...I guess once you have all you want..you need more to get you out of bed... It is said you don't want to be rich , but " richer than the next guy ".
 
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