Networks of Trust are Vulnerable

The offline story of how former Nasdaq chairman  Bernard Madoff evidently took $50B from investors in a massive Ponzi scheme has been been a staple in the press since the story broke last week. But what caught my eye today was an article in the Wall Street Journal. The title, “Madoff Exploited the Jews“, strikes me as a bit glib, but it’s the subtitle that struck me:

Networks of trust are vulnerable. No law can change that.

Diving deeper into the article:

His contacts and connections, his religion and affiliations, his public and private positions, all worked to make his funds look legitimate and exclusive. And he knew how to play his prospects, when to turn potential clients down, when to give something extra.

And finally the closer:

The violation of trust at the heart of that story — of trust by those with the greatest reason to trust — cries out for sympathy. It illustrates the limits of law, not the need for more of it.

The stories of con men (and the occasional con woman) go back centuries, and perhaps there’s nothing new to see here. But I think this story should serve as a wake-up call to those of us who see trust as the foundation of building value in online social networks.

A common criticism of online social networks is that they are less robust than offline ones because there is no substitute for the trust we build through offline interactions. But perhaps the real problem is that we have never learned how to reliably calibrate trust, offline or online. The efficiency of online communication, ideally suited to keeping us more informed, can also propagate disinformation at unprecedented rates (cf. information accountability). We need to learn how to manage our trust more rationally. Perhaps technology can help.