Bankers and Wall Street take cheating to new levels

[ What follows is an excerpt of an interview between behavioral economist Dan Ariely (DA) and Graham Lawton (GL) in New Scientist  16 June 2012 “The Cheating Game“. This is yet another reason another worse crash is inevitable (in addition to lack of reform since the last crash, with much bigger too-big-to-fail banks, and the ratings agencies back to giving top ratings to junk ]

DA: What about the real world and cheating?

GL: In banking, the rules are very unclear and because of that, there are lots of things you can do and still feel good. We did a study asking people to imagine being the head of a bank, and they could do things like increase fees and charges. The moment you tell people that they’re working for a company, that the motive is to maximize shareholder value, they’re much more willing to cheat.

DA: What if you take money out of the equation?

GL: One of the most frightening experiments we did was when we got people to cheat for tokens that they could then exchange for money. When they reported how many of those mathematics questions they got correct, they doubled the cheat. The act of lying for something that is one step removed from money relieved them of their moral obligations. Think about what happens with mortgage-backed securities and stock options.

DA: Do you distinguish between widespread, low-level cheating and people like financier Bernie Madoff, who is in jail for stealing billions?

GL: I don’t think there is a big distinction. They have an opportunity, regularly, on a bigger scale, and they have time to escalate things. We find that once you start cheating, it’s easier to justify more and more. There is a slippery slope. I’m not saying there are no psychopaths out there, but the vast majority of dishonesty is, I think, caused by rationalization rather than crime.  I recently interviewed a federal judge and he said he has never met a person who thought about the consequences of their crime. People have no idea how long they’d spend in prison if caught. There was a study recently that looked at the death penalty. If you think about deterrence, the death penalty is right up there. But it’s unclear that the penalty is actually decreasing crime. So deterrence is not getting us as much as we think, partly because when people commit the crime, they don’t really think about it.

DA: Is cheating and dishonesty evolutionary?

GL: There’s probably an equilibrium in which some dishonesty is allowed to be maintained and some is not. The tricky thing about evolutionary explanations is that we did not evolve in an environment where we could spend a couple of billion dollars on a particular hedge fund, so the size of the risks that we are able to take under this logic and the size of devastation we can create is much, much higher.

DA: Will building the big picture about why and how people cheat make people more honest?

GL: I think it’s incredibly important for us to realize how capable people are of cheating a little bit and still feeling good about themselves. If you look at the time between the start of the global financial crisis and now, and ask what we’ve learned, the answer is not much. This book is about all the things we haven’t learned. From this perspective, it’s going to be a very sad journey. The main audience is bankers and regulators, and my fear is that the people who need to listen the most are the ones that are least likely to listen.

Dan Ariely is professor of psychology and behavioral economics at Duke University in Durham, North Carolina, and founder of the Center for Advanced Hindsight. He is the author of bestseller, Predictably Irrational, and The (Honest) Truth about Dishonesty.

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