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10:21 AM
Andrew Waxman
Andrew Waxman
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Where's the Next Bernie Madoff Hiding?

Wall Street isn't the only place the the next con man could be hiding; academia and other industries can also fall victim to data manipulation.

An eminent man was recently charged with conducting a fraudulent scheme for over ten years.

His results were always positive and he had risen to a very prominent position in the industry.

Everyone wanted to invest in him.

Sounds like a person in finance we have all heard of right? Wrong, actually this is a Dutch academic. In a reminder that con man risk is not limited to the financial industry but is inherent across all human endeavors, the experiments and studies of a well known Dutch academic were recently exposed as being totally fabricated.

Diederik Stapel, profiled in a recent Sunday Times Magazine by Yudhijit Bhattacharjee, had shot to academic prominence over a relatively short period of time because of a number of cutting edge articles he had published based on his very successful experiments. In 2010, he became Dean of Tilburg University's School of Social and Behavioral sciences.

There was only one problem: his data was manufactured. In one example, a study purported to link racism to environmental untidiness using evidence of white peoples' seating preferences relative to black people nearby. Even when confronted with the allegation of fraud, Stapel thought he could convince his accusers otherwise and attempted to retrace the evidence to the spot he had claimed to conduct the experiment, the railway station of Utrecht. Finding it impossible to do so, Stapel gave it up.

Like Madoff or Peregrine, Stapel had created a data set that matched what people wanted to see. In the case of Madoff, those people were his investors. In the case of Stapel, they were fellow academics, students, research funders.

Madoff perfected the art of the arch manipulator of peoples' desires. He showed people what they wanted to see: consistent results in line with their wishes. No one complained. Madoff's skill was to create consistent results that appeared authentic from month to month. Yet the results were always positive. How many fund managers were able to achieve such consistently positive results over such a long period? No one. But provided the individual months appeared reasonably in line with other top performers, no one it seems, or not many at least, questioned the unlikelihood of such results over the long run. It must be possible because he is doing it.

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As it was with Madoff, so it was apparently with Stapel. First, like Madoff’s individual monthly returns, each of Stapel’s individual experiments produced results that appeared plausible. In the recent Sunday Times profile, Stapel is quoted as saying, “I always checked that the experiment was reasonable, that it followed from the research that had come before, that it was just this extra step that everyone was waiting for.” For every experiment, Stapel knew the effect had to be small to be believable. Like Madoff and others, while he had many collaborators and supporters, Stapel retained close control over the fraudulent scheme, over the fabrication of results. One professor who became suspicious started playing close attention to Stapel’s experiments, and is quoted in the Time s Article as saying, “I don’t know that I ever saw a study that failed” and then goes on to say, “even the best people, in my experience, have studies that fail constantly. Usually, half don’t work.” Yet it seemed to take a long time before that unusual fact pattern drew suspicion.

So the evidence suggests that people who are determined to commit a con, provided they have plausibility in the work they produce, and are eminent in their fields, are hard to stop. While eventually such people are generally stopped and brought to justice, the time it can take is depressingly long.

Andrew Waxman writes on operational risk in capital markets and financial services. Andrew is a consultant in IBM's US financial risk services and compliance group. The views expressed her are those of his own. As an operational risk manager, Andrew has worked at some of the ... View Full Bio
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