The fallout from the Madoff scandal has left us with one important question: why do Smart People keep falling for financial pea and thimble tricks? Why do people with high IQs keep getting taken in by scams?

Psycholologist Stephen Greenspan analyses the reasons why this keeps happening in his piece republished in The Wall Street Journal. And Greenspan should know: he lost a big chunk of his retirement savings to Madoff.

Greenspan identifies four factors:

Situations: In Madoff's case, there was a cult of investors, an in-crowd. Investors were competing to join the club, most of them were Jewish and Madoff himself was a prominent Jewish philanthropist. Another factor was that Madoff promised modest rather than spectacular gains. Smart investors would have been highly suspicious of a promise of spectacular gains as spectacular and Madoff seemed to exploit the fact that these investors were looking for small but steady returns, high enough to be attractive but not so high as to arouse suspicion.

Cognition: Many investors got around their ignorance of finance by working with advisers who, in turn, got taken in by Madoff.

Personality: People who got taken in had personalities that were a mix of trust and niceness with the occasional tendency toward risk-taking and impulsive decision-making.

Emotion: Many investors wikth Madoff were not motivated by greed but by the desire to build and maintain enough wealth to have a secure and happy retirement. If they were greedy, they could have just gone for CDOs but this appeared to be safe.

Greenspan's analysis suggests it would be too easy to say scepticism would have saved the investors. What they needed was to maintain some sort of safety net if Madoff turned out to be a fraudster.

The other implicit warning in his analysis is that these four factors will continue to be aroound long after Madoff, and his investors, are dead and buried. Which suggests that we will keep falling for scams as we are hard-wired to do that.