Madoff investors had so much fear of losing, that they lost it all? They choose a "never had losses" fund that really turned out to be "always losses"?
'outcome bias', from wikipedia: They so wanted a risk free return of 12% as an outcome they would ignore facts that did not support this outcome. There is also an 'diagnosis bias' at work here too probably. Once a decision to invest with Madoff was made they would ignore any facts that did not support that decision. In short, 'Conviction hates evidence'. Two books that cover the various 'decision traps' are 'Sway' and 'Predictable Irrationality'. Good trading!