In the film A Fish Called Wanda, Archibald Leach, played by John Cleese, borrows a friend's flat only to be surprised by visitors while he is standing naked in the living room with his underpants on his head. Articulate barrister though he is, Leach finds that the situation defies dignified explanation.

Such is the predicament of a fraudster in a recession. Too many people to whom he owes money need it back. Some conmen seek to fob off creditors for a while. Claims of illness and problems with counterparties are trusty favourites. But eventually even the most ingenious conmen run out of plausible excuses and, in large-scale deceits, they are rarely worth the effort anyway. Of all the questions that surround financial scandals, how the fraud came to light is often the easiest to answer.

More problematic is how it was committed and continued so long. Typically, we tend to look for an explanation in the attributes of the victim. Within hours of the Madoff disaster emerging, it was being suggested that investors had not performed proper due diligence. What happened awaits proper scrutiny, but our readiness to pronounce the victims of the alleged fraud to be foolish is worth noting. Sometimes, it is true.

For example, the victim may be investing without advice in an area that he does not understand. But this cannot always be the explanation. Indeed, “loan kiting” frauds - borrowing money for fake trades, and then borrowing more to pay it back - target financial institutions operating in areas in which they are highly experienced. The huge Solo, Hamco and RBG frauds of the past decade show how successful they can be.

Another reflex is to regard the victims not as naifs, but as willing risk-takers. Again, sometimes this is so, but it is not always the explanation. Not all fraudsters appeal to the victim's greed and risk-taking. Indeed, some appeal to his caution by deceiving him as to the extent of his security.

So why do we focus on the supposed foibles of the victim? Partly it is because we tend to think that the fraudster's lies should be obvious for what they are, particularly when told face to face. In this, we fool ourselves. Experiments show that we are nowhere nearly as good at detecting deceit as we like to think. Add to that the fact that many fraudsters are fantasists and prepared to act on their own lies themselves (a propensity sometimes described as “acting out”) and it is unsurprising that some seem so convincing.

If we are to find some explanation of large-scale investment frauds, it must partly be that each investor is as encouraged by the involvement of the others as he is by the fraudster. A catalogue of frauds, from the South Sea Bubble in the early 1700s to the pyramid schemes that came to represent some 30 per cent of Albania's GDP in the mid-1990s, show the power of cohort effect in scams of this kind.

According to Robert Shiller, Professor of Economics at Yale, the effect is closely linked to investor bubbles and a belief in the permanence of temporary profits. Professor Shiller describes what he calls a “feedback loop” in which the belief becomes - for a time - a self-fulfilling prophesy, initial price increases of an investment leading to further increases as demand grows.

The phenomenon, Professor Shiller says, is not limited to fraud (think dot-com bubble) nor is it modern (think tulip fever). As with all pyramid schemes, a crash is inevitable, although as the Madoff scandal may show, a recession - with investors needing their money back - will act as a trigger.

The discovery of small-scale frauds often lacks such a clear catalyst. Sometimes, the victims of fraud accept far more outrageous lies having parted with their money than they were told before doing so. Indeed, some who are clearly uncomfortable will even invest more because they are told it will help to get their original funds back. The victim does not regard himself as gullible but realises on some level that he has invested in a suspicious scheme.

The latter perception must yield to the former and so the fraudster must continue to be believed. This process, termed cognitive dissonance, is a powerful one and whether or not they know the name for it, fraudsters exploit it ruthlessly. Ultimately, the result is to make the fraud more humiliating for the victim.

Other theories of fraud focus on the fraudsters themselves. Evolutionary biologists say that natural selection generates a small proportion of the population who are predisposed to take advantage of the trust we place in each other. Provided that there are not too many of them (so that the rest of us find trust is still worthwhile overall) these conmen will thrive. In other words, fraud will always be with us, but then I think we had already guessed that.

The author is the head of Allen & Overy's Trust, Asset Tracing and Fraud Group

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