Professor/Lecturer Ellmann's Course Materials Page

The sucker elites
economic thought
MBA/MA - Anglo-American University International Finance
ERASMUS - International Finance
MBA - Money and Financial Markets
ERASMUS Money & Banking
M.A. Public Policy Economic Sociology
On the Origin of Facts

With E. Kinney Zalesne

For most of this century, con men and hucksters preyed on the uneducated and the elderly who couldn't read the fine print. Some still are.

But now we learn that the real mother lode for con artists is not composed of uninformed dowagers who were left an estate they don't know how to manage, but rather the Impressionable Elites* of country clubs, and the rarefied hedge fund managers of Wall Street and Greenwich.



Forget about huge, sweeping megaforces. The biggest trends today are micro: small, under-the-radar patterns of behavior which take on real power when propelled by modern communications and an increasingly independent-minded population. In the U.S., one percent of the nation, or three million people, can create new markets for a business, spark a social movement, or produce political change. This column is about identifying these important new niches, and acting on that knowledge.

In "Microtrends: The Small Forces Behind Tomorrow's Big Changes," I take the view that 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.

Bernard Madoff proves the point. Here he is, in the most numbers-dominated part of our economy, and no one questioned his numbers. He sold himself to people on the basis of brand, and he got access to more marks by using the smart, rich and famous to introduce him to more of the smart, rich and famous.

Historically, elites have behaved like this. They follow a path from being the founders of new nations to the dupes who stand by as their piece of civilization is sacked and pillaged. It's like the old cliché about Nero fiddling while Rome burns. We are not quite where Rome wound up, but we're exhibiting some of its tendencies.

What happened in America before the financial crisis is that we had the fastest expansion of the elite population in history. In 1996, the top 1% of voters and consumers made $200,000 a year or more. Now, in the last election, 6% of the voters made over $200,000 a year -- a surprising sixfold increase in what used to be called the top 1%.

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?

How else could you explain Mr. Madoff allegedly making off with $50 billion dollars of elite money in the largest Ponzi scheme in history? Or Marc Dreier, the lawyer accused of selling $380 million of non-existent promissory notes to major investors?

At a recent meeting of my condo, the residents were asked if they had read all those documents they signed when they bought their apartments. One hand went up. Most of the residents hadn't even asked their lawyers check them out.

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.

The entire financial crisis was started by small microtrends overlooked by some of the best and brightest minds at institution after institution. The crisis started with a default rate of something like 17% on subprimes, which were only about 10% of the marketplace -- or a total of about 1.7% of all mortgages. This tiny but growing group of borrowers -- a microtrend -- had enormous consequences for unwinding trillions of dollars of leverage and freezing the entire credit system. It happened because the best and brightest minds simply ignored those forces as too small to matter, too improbable to become important. But they did.

So now these same elites, and the millions who trusted them, 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.

And real transparency just might sell again to elites who used to love to invest in the black box. All Madoff and Dreier did was prey on the basic fact that elites don't really ask questions of other elites, and don't really demand answers when they do. Maybe that will change.

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.

The Dreier and Madoff scandals show just how impressionable even the smartest, best educated elites have become. But the reaction to their own unwinding, and to the reality of the financial crisis, just might bring them back to earth.

* "Impressionable Elites" is the term we used for educated, affluent people who focus more on personality than issues when it comes to evaluating political decisions. For more, please see pages 131 to 135 in "Microtrends."

** A PSB poll of 806 telephone interviews among likely 2008 presidential voters, including an oversample of 400 very likely Democratic presidential primary voters.

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