What Advisors Can Learn from Bernie Madoff

March 10, 2015

by Dan Richards

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Few advisors would admit that they have anything to learn from Bernie Madoff. But setting the obvious ethical issues aside, advisors can still learn from the peer group influence that made Madoff a safe choice in retired Jewish communities in New York and Florida.

When it comes to building portfolios, it’s not good practice to be swayed by what others are doing —in other words — to follow the herd. But one of the core laws of persuasion is to tap into peer group momentum. This can help you make your case to existing and prospective clients.

The law of social influence 

Robert Cialdini of Arizona State University is noted for his research on how to influence behavior. I described one of his laws relating to the principle of “request and retreat” in my article, “The Question that Quadrupled Response Rates.” Another of Cialdini’s laws of influence relates to peer group pressure, also known as the law of safety in numbers. Quite simply, people are influenced by what people similar to them are doing.

UCLA’s Noah Goldstein studied the power of peer group pressure using different messages to get hotel guests to reuse towels. Here are two different signs that were tested:

  1. Help us reduce our energy bill.
  2. Help us save the environment.

When greeted with the first sign, 16% of guests reused towels – not a great response and not a surprise given that the message was entirely self-serving for the hotel. By contrast, when encountering the appeal to save the environment in the second sign, guests reused their towels almost twice as often, at 31%.

Goldstein added a sentence to the second message:  “Last year 75% of guests in this hotel reused their towels and helped save the environment.” By adding that second sentence, towel reuse increased to 44%.

When Goldstein changed “75% of guests in this hotel” to “75% of guests in this room,” he saw a further increase to 49%.

The conclusion: The more people feel that others like them are behaving in a certain fashion, the more likely they are to mimic that behavior.

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