Why FTX Investors Fell Under the Sway of Sam Bankman-Fried

In April 2022, Tony Blair and Bill Clinton appeared on the FTX stage at the Crypto Bahamas conference. They sat alongside Sam Bankman-Fried, the founder and then-CEO of the crypto exchange FTX. The presence of Blair and Clinton lent credibility to FTX and the burgeoning crypto industry. A few short months later, FTX abruptly collapsed.

According to bankruptcy filings, the company could owe money to upwards of one million FTX investors. It has emerged that FTX and its sister companies allegedly failed to follow standard financial reporting procedures. FTX’s current CEO, John Ray, described how bad things had become under Bankman-Fried's leadership, saying, “never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

Why did so many people fall under the sway of Bankman-Fried and overlook signs that things were too good to be true?

Psychoanalysis observes that followers can unconsciously identify with—or imagine themselves being—leaders whose behavior goes against socially accepted norms and standards. The behavior of such leaders resonates with unconscious aspects of ourselves, which harken back to early times in our lives before we were socialized and internalized the norms of society.

As infants and young children, we were ruled by the pleasure principle of immediate satisfaction and escape into wishful fantasy. Although as grown-ups we have increasingly come to accept the reality principle of delayed gratification, and with it, the truth that not all wishes can be satisfied, developmentally earlier aspects of ourselves are never completely abandoned. Under the hypnotic influence of an uninhibited leader, we behave in ways we would otherwise consider irrational or harmful.

On the surface, the intellectual tech bro leader seems the opposite of the traditional powerful leader in whom followers lose themselves. But we can see that Sam Bankman-Fried connected as a leader with his followers and FTX investors not in spite of but because of his tech bro persona.

1. Bankman-Fried is no exception to the trend of tech leaders underdressing for the occasion—a trend going at least as far back as Steve Jobs and the black turtleneck that was the backbone of his business wardrobe. Bankman-Fried's particularly schlubby approach to dressing is an even greater affront to the more polished style we associate with traditional business leaders.

On stage at the Nassau meeting, Tony Blair and Bill Clinton wore well-tailored suits as they sat next to Bankman-Fried, who wore his trademark baggy t-shirt, oversized shorts, and sneakers. Blair admitted to feeling "a little overdressed." The contrast on stage that day illustrates the freedom Bankman-Fried was granted to forego social norms built into the business world. We unconsciously—or even consciously—identify with him to the extent that this freedom resonates with our own repressed longing to live our lives according to the pleasure principle of immediate personal satisfaction and do exactly what we please when we please.

2. Bankman-Fried crossed the line between work and play that defines life for most adults. This became clear during a Zoom meeting with investors from Sequoia Capital. Ramnik Arora, FTX's head of product, was in the same room as Bankman-Fried and thought he was "absolutely fantastic" in answering the investors' questions.

When Arora later walked over to Bankman-Fried, he realized that the CEO had been playing "League of Legends" the whole time. Bankman-Fried enjoyed the freedom to engage in play, unencumbered by outside realities, in conducting his work life. Most of us lack such freedom, and we connect to him on a deep level insofar as we wish to be in his position.

3. Bankman-Fried spoke as if he had created a new magical reality in which it is possible to overcome the limits on satisfaction inherent in the world we all inhabit. In an interview with Bloomberg, Bankman-Fried was asked to explain the concept of "yield farming," which is the method he had supposedly mastered for earning massive windfalls.

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He answered that crypto yields could be "squeezed" from a metaphorical black box that does "nothing." When we listen to this, the grown-up aspects of ourselves are able to recognize how unlikely this sounds. But because aspects of ourselves remain prone to escaping into the magical thinking of childhood, we identified with Bankman-Fried's approach to reality and happily allowed him to lead us into the future.

Bankman-Fried's freedom to exert influence as a powerful tech leader has been halted, at least for the time being. He was arrested in the Bahamas on December 12, 2022, and he has since been brought to the U.S. There, he will remain confined at his parents' California home until he stands trial.

The tale of his rise and fall should lead us to look inward and ask what it was about him that resonated with us. We are being led into the future by tech leaders who are unlike the traditional leaders who have exerted power throughout human history.

Yet, these contemporary leaders' influence on their followers draws on familiar psychological mechanisms. Without exercising self-awareness and critical thinking, we may hypnotically follow a tech leader's bad ideas. Only when it is too late will we have snapped out of it and realized that the utopia we were promised actually led to more suffering than happiness.