Bankers Lie. So Does Everyone Else.
A paper in the prestigious journal Nature shows that bankers tend to lie and cheat in their professional roles. This conclusion seems so obvious that the researchers from the University of Zurich who came up with it could almost be candidates for the Ig Nobel Prize. The idea has another problem: the phenomenon they describe has more to do with the power of money in general than with just the culture of the financial industry.
Alain Cohn and his two collaborators used a standard method for gauging people's propensity to cheat. Subjects are asked to roll dice -- or, in the Swiss study, flip coins -- and try to guess the outcome for a cash reward. The trick is that the subjects report the outcomes themselves. On average, with 10 tosses of a coin, there is a 50 percent chance it will land either heads or tails each time. A subject who reports beating those odds is probably lying.
In the Swiss experiment, 128 bankers were split into two groups. Members of one group were asked neutral questions about their daily lives; those in the other had to answer specific queries about their banking experience. The first group reported that it had guessed heads or tails on 52 percent of the tosses. For the second group, the average was 58 percent, and a 10th of these bankers claimed the maximum possible $200 reward; that kind of luck is almost impossible.
When the researchers played the game with professionals from the pharmaceutical and tech industries, people who were asked about their work were as honest as those who were asked neutral questions. That was the basis for the researchers' finding that "the prevailing business culture in the banking industry weakens and undermines the honesty norm, implying that measures to re-establish an honest culture are very important."
That conclusion, however, is probably flawed. In 2002, the Israeli behavioral economist Uri Gneezy showed that the decision whether to lie is a trade-off between the benefit to the decision-maker and the cost to others. As the payoff grows, it increasingly outweighs the altruistic consideration.
Gneezy proved this by playing a "salesperson game" with his subjects:
You wish to buy a new vacuum cleaner. There are two vacuums you are considering. Consulting with a salesperson she recommends one “because it is better.” Should you follow the advice? Maybe she is paid a higher commission for this product, and that is why she recommends it? Similarly, imagine that you go to a tourist’s restaurant and the waiter recommends the lobster. Are you going to follow her recommendation? If you think the waiter recommended it because she thinks it is better, you would. But what if she recommended it simply because the cook told her that the lobster is not fresh, and must be sold today? When are the salesperson and the waiter more likely to lie?
The "waiter" or "salesperson" in the game correctly assumed her advice would be followed, and chose to lie either when the "customer" didn't stand to lose too much from the bad information or when her payoff from lying was sufficiently high.
"The implications of the above is illustrated by the purchase of a car: You can trust what the seller says about the condition of the brakes more than what she says about the state of the air conditioning," Gneezy wrote.
The Israeli researcher also asked his subjects about the acceptability of lying in certain situations. Many agreed that it was generally admissible to deceive a big, wealthy institution such as a bank or an insurance company. For example, 11 percent said that it was "almost always acceptable" to allow a doctor or a lawyer to submit bills to an insurance company for services they hadn't rendered. Gneezy concluded that "people are more accepting of fraudulent behavior toward large organizations or rich counterparts than towards an individual: The monetary cost may be identical, but the damage to the individual is perceived as greater."
Gneezy's subjects were students. Some may have become bankers. I doubt that changed their behavior too much. It isn't the culture of banking that creates incentives to lie. Deceptive behavior carries bigger rewards in the financial industry simply because bankers deal in large amounts of money, and their counterparties are often big institutions -- regulators, funds, wealthy clients and governments. It isn't just bankers who would lie, or condone lying, in that context.
To test my hunch, the Swiss researchers would have needed to play their coin game with people in other industries who face potentially high rewards for lying, say tech start-up managers or government officials. Or journalists, for that matter: Stephen Glass must have found the returns of lying were an acceptable trade-off for the damage his lying inflicted on others, and he was cheating an institution -- his employer, the New Republic.
You can't fix human nature with ethics codes or by preaching about cultural change. The only way to get bankers, or people in any profession, to be more honest is to minimize the gain from lying, and establish a higher financial reward for ethical behavior.
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