Behavioral economist Dan Ariely's research has found that the cumulative impact of various forms of cheating has a significant effect on the world economy. His experiments show that people, across a wide range of situations, will cheat just a little bit, even when given the opportunity to get away with more; but reminders of core values can reduce cheating. He discusses the implications of these ideas for managers and professional organizations.
Q: There's an ongoing discussion about whether business could or should be a profession. What does your research show about whether professions in general lead to honest or ethical behavior?
We don't have direct research on professions. It's very hard to compare people before they become professionals and after. But we do find that codes of ethics of the sort that professions often have are, on the one hand, very important and, on the other hand, very dangerous. The good side is that they guide you to stay away from potentially ethically compromised situations. On the bad side, if professionals see their peers stretching boundaries and they go along, there's a chance for very quick deterioration.
People have two goals: We want to look in the mirror and feel good about ourselves, and we want to benefit from cheating. You would think you couldn't get both, but our psychology is sufficiently flexible that we can as long as we cheat just a little bit. We have found this to be the case in experiment after experiment.
In my view, most people who behave badly are not bad people. They're just good people who are put in bad situations—where it's tempting and easy to cheat a little bit. Look at the whole financial crisis, if you and I were getting paid $8 million a year to view mortgage-backed securities as good products, we could do it. It's inhumane to put people in situations that have tremendous conflict of interest and expect them to be unswayed by it. Ideally, professions eliminate these problems by not making people face them.
But the laws Congress passed on appropriate lobbying expenses are a case study in how a group of people can end up behaving terribly. If you think about it, people in Washington are all one big party. I mean, we think of them as Democrats and Republicans, but really they're working together. They look to each other for what's acceptable and what's not acceptable. What happens when one person behaves a little less ethically? Other people take it as a standard. Lobbyists cannot give gifts worth more than $50. So what do lobbyists do? They buy a bunch of basketball tickets. They offer one of them for sale within their company for $50. Now they've established that it's worth $50 — that's the market price. And now they can give it to people they want to lobby.
Of course people accepting the tickets understand that this was bypassing a law that they made themselves, but they see everybody else doing it. So that's the danger of things accelerating.
We've run one experiment on cheating in several countries. We give people a piece of paper. We ask them to solve problems. We pay a dollar per correct answer. We establish a baseline by collecting some of the papers. Then with others we have them shred the answer sheet and tell us how many correct answers they had. We looked at China, Israel, Italy, the U.S., and England. In all cases, people cheated about the same amount.
But we also did this in bars in Washington, D.C., where the congressional staffers hang out and bars in New York City where bankers hang out and measured how much they cheated us. I was sure that the politicians would cheat more than the bankers. But it was the opposite by a big margin. So we figured out bankers really need to work on their professionalism.
Q: Are there ways to improve?
People are basically blind to their own conflicts of interest. When you ask physicians, "Are you susceptible to conflict of interest?" they say no. But if you ask about other people, "Oh, yes. Everybody else is, but not me." We just are not designed to notice these sorts of things in ourselves. The professional bodies that establish the rules care about it. And they have the long-term view. Doctors, lawyers, accountants can all push for improvement. I think there is a way that professionalism could influence the business world. And I actually think that universities are probably the best place to start.
Q: Do professions seem to help people perform better compared to areas that don't have a professional oath or certification?
I would like to think so. It's hard to figure out, exactly. But I can tell you, for example, engineers have told me that they feel that wearing the engineering ring on the left hand is actually very helpful, because when they draw something and they see the ring; it reminds them about the mission of engineering.
Doctors' white coats are interesting, because on the one hand, they are a reminder about what the doctor should be standing for, but in England they just banned them, because doctors don't wash them the same way they would wash their clothes, so they are a means for transmitting infection. But in general, reminders are useful.
We did an experiment with a big insurance company. We mailed 20,000 forms that asked people how many miles they drove last year. People received one of two forms. You were either asked to put in the number of miles you drove and then sign below. Or you were asked to sign at the top and then write the number of miles below that.
Everybody wants to report a lower mileage, but our logic was that if we remind people about their own morality, they would actually report the higher mileage. And that's what we got. On average, people reported driving 2,700 miles more if they first signed and then wrote the number down.
Now this is not exactly professionalism, but it says that it makes a significant difference when you remind people about their core values.
Q: How regularly do we have to be reminded in order to have that impulse to act more honestly?
Sadly, I think quite frequently. But we don't have to be highly thoughtful about morality all the time. We really need to do it at important points in time. For example, I proposed to the Israeli IRS to move the Israeli tax day to be next to Yom Kippur, the Day of Atonement. I don't know if it would work, but the idea is that you have people already contemplating their decisions, so they may be more inclined to be more honest. Similarly, you might be thinking that April 15th is not a good day for American tax day. If you linked it with New Year's when people set resolutions and try to turn a new page, people might actually report different taxes.
In one experiment we had atheists swear on the Bible, and then we gave them a chance to steal money from us. They didn't. When atheists swear on the Bible, they don't think "God is going to punish me," but they do remind themselves of the importance of morality.
The good news from all of this is that, in reality, people are more moral than rational economic theory would predict. Think about all the opportunities you have to steal stuff when nobody could ever catch you. Have you taken all these opportunities? It's not just the fear. People are nicer than economic theory would predict, but there is this selfish element to us; we're not purely altruistic. And it's a game we're playing between our selfishness and our concern with social norms.
There is a fudge factor created by our ability to rationalize. And when we get people to think about their morality, they cheat less. When we make it easier to rationalize, they cheat more.
Our experiments find that people feel freer to cheat if they get a token that can be exchanged for money than if they are given money right away. The analogy that you can use is that a CEO of a company will never take $100 from the petty cash box, but might backdate stock options.
Embezzlement in companies is huge — things like inviting a friend to dinner and charging it to the company or taking office supplies. Those things, together, are much, much larger than the entire market for arson, larceny, theft, car theft, and home burglary combined.
Q: In some ways this is an absurd question, but how do we know we would be happier or better off if this weren't happening?
So would human beings be better off without conflict of interest on a personal psychological level? It's hard to tell. Having our own biases can probably protect us to some degree from feeling bad about all things that are happening in life. But from the perspective of the market, there is no question we would be much better off. We would be able to solve many more big problems. Nobody thinks it makes sense to pay judges three percent of the verdicts that they pass out, right? It's as crazy to do that for our physicians or financial advisors. But somehow we don't see it that way.
If there was an investment bank that opened tomorrow saying, “Bankers are the keepers of economic life. We are going to pay our people well, but their pay will not create any conflict of interest. There won't be bonuses. The incentives come from being important contributors to the stability of the society.” If that happened, I would immediately move all my money there.
You can imagine two mechanisms to make that happen. You can imagine a mechanism where the government says let's do things this way through regulation. But it is tough to pass regulation these days. And you can imagine a situation where private industry does it, though it's very tough to open new financial institutions given current regulations.
Q: Is it worth creating a code for business professionals?
I think so. Before the banking crisis, I simply assumed bankers were greedy bastards, and I wanted the greediest one to work for me, right? But now I have a whole new appreciation for banking. The fact that when banking stopped, the economy stopped, makes me think that these people are really the guardians of society in an important way.
Businesses are similar. We had this idea for awhile that CEOs should only care about the welfare of the shareholders for the next quarter. That's a very specific view of business, but now we have basically borrowed from our future in a substantial way, and the only way to really get out of this is significant innovation. Much of that is going to come from business, not from the government. The reality is that we are all looking to business as the main mechanism to advance society. And as such, I think it's incredibly important to have an idea of where we are going. Is it a world in which each business just cares for itself? Or is it a world in which businesses have some responsibility and an interplay with society at a larger scale? A code could play some part in clarifying that.
People work for salaries, sure, but they also work for meaning and they work for an ideology, and to connect themselves to what other people are doing. Jobs are really important for people's meaning of life. Once we understand this, things could get much better and we could actually motivate people to be much better.