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What makes people dishonest? Being a banker helps. That’s according to new research from three Swiss economists published in Nature Wednesday.
From scandals like LIBOR to excessive executive compensation, our society often chalks up misbehavior in the financial industry to “business culture.” But as the authors write, there’s been no scientific proof for that rather nebulous condemnation. Until now.
That’s not to say they’ve proved bankers are bad people — far from it. In their paper, “Business Culture and Dishonesty in the Banking Industry,” Alain Cohn, Ernst Fehr and Andre Marechal show that bank employees are not more dishonest than employees in any other industry. So what gives?
There’s a difference between people who happen to work at banks and bankers. Huh? Here’s where the social science comes in. According to identity economics, we all have multiple identities whose social and ethical norms emerge depending on which identity we’re feeling closest to at any given time. So, when bank employment is a salient identity for bank employees, they are, on average, more likely to lie — in this case, about their win-loss percentage in a series of coin tosses.
Making Sen$e has reported on related research from the University of California at Berkeley showing that wealth encourages unethical behavior. That’s even the case when it’s performative wealth — holding a cash advantage in a game of monopoly, for example. The saliency of that wealthy identity makes people behave worse. Watch those experiments in our “Money on the Mind” video below:
No industry has a worse rap for both wealth and unethical behavior than banking. But bank managers are well aware of that fact, the researchers stressed. That’s why, they said, one large, international bank gave them access to 128 of their employees, whom they supplemented with 80 employees from other banks. All of those institutions remain anonymous.
In keeping with the economists’ identity theory, their first step was to randomly divide all the bankers into two groups. The control group answered survey questions about their television viewing habits. The treatment group answered questions about their banking jobs. Then everyone in each group flipped 10 coins and recorded their results in private. The researchers waited to see how close each group would come to the 50 percent win rate that statistics would call honest.
But first, they gave all participants a reason to lie. Before each toss, they’d announce heads or tails. If participants’ coins landed on that side, they’d win $20. That made for a maximum incentive of $200.
The treatment group, with their banker identities fresh in their minds from those survey questions, reported a win rate of 58.2 percent, compared to the control group, which reported a win rate of 51.6 percent, close to the statistically expected average. Remember, the control group was made up of bankers, too. Presumably they just weren’t thinking about banking culture as much when they were flipping.
But could answering a few questions about their jobs really have made banking culture — more on what that actually is later — so dominant in the minds of the treatment group? To further test the effects of those surveys, researchers played a little “fill in the blank” with the study participants. After taking the survey, when presented with the letters “—oker,” for example, members of the banking group were more likely to spell “broker” or some other banking-related word than their control group peers, who might have just as easily spelled “smoker.”
Who’s to say dishonest coin flipping is a banker problem, though? Researchers went beyond banking too, conducting the same experiment with treatment and control groups from other industries. When professional identity was made more salient in the minds of those other middle and upper managers, they were not more likely to lie.
So then, what is it about banking culture, the researchers wanted to know, that sanctions dishonesty?
First, a word about culture. On a call with reporters Tuesday, the researchers said that they don’t see dishonesty as an edict coming from above. In fact, employees who’d been at the bank for more than 10 years cheated less than newer hires. Their behavior is driven not, researchers said, by direct instruction, but by what’s thought to be tolerable.
Rare is the banker who doesn’t want to get rich. But the economists narrowed down that cultural norm to something more specific: what wealth means to bankers. In order to get an “approximation of their materialism,” they asked participants if “social status is determined by financial success.”
And while that question wouldn’t always seem the most reliable indicator for materialism or materialistic thinking, that test proved to be the researchers’ silver bullet. On average, participants in the treatment group — the ones who were more dishonest — agreed more than the control group that financial success determines social status. In fact, the stronger the accord with that statement, the more coin toss wins reported.
Despite the limited size of their study, the researchers are confident that their sample yields results that can speak for the industry. Their study raises questions, though, about how much a simple coin toss experiment can really capture about bankers. Given statistical averages, it’s fairly easy to tell when someone’s lying about their win rate (provided a coin is flipped enough times). But dishonesty in banking can be less transparent. Therefore, it’s possible that bankers, in both the control and treatment groups, felt more accountable to their consciences in the study than they would on the trading floor.
For those who want to heal the industry’s reputation, though, this study brings good news. In short, bankers are not inherently evil. Rather, it’s the atmosphere in which they work that inspires their behavior. Banking norms, while perhaps deeply entrenched, are at least more easily rehabilitated than are bankers’ consciences.
For the industry’s own survival, the researchers argue that the ethical norm has to change from within the banks themselves. Making bankers take a Hippocratic oath of sorts, in conjunction with ethics training, they suggest, “could prompt bank employees to consider the impact of their behavior on society rather than focusing on their own short-term benefits.”
There’s support for that kind of intervention from behavioral economics, too. When Paul Solman spoke to Duke behavioral economist Dan Ariely in 2009, in the immediate aftermath of the financial crisis, he saw the same “crisis of trust” plaguing the banking industry. But he thought taking revenge on bankers — limiting bonuses or changing the tax code — as a means of fixing the system would be useless. “The real problem,” he said, “is that the bankers were facing a situation in which they could distance themselves from what they were doing.”
In his own experiments, Ariely has found that people are more likely to steal a bottle of Coke, for example, than cold hard cash. That effect is magnified on Wall Street, where bankers, Ariely has found in his experiments, cheat by about twice as much as other people around the country. Again, that’s not because they’re bad people, said Ariely, but because their work involves, as Paul Solman described it, “things that are easier than cash to rationalize stealing, like extra shares of stock via the backdating of stock options, say.”
What Ariely would really like to see is the kind of norm change the three Swiss economists allude to. “My real hope,” Ariely said, “is that one bank will decide to be the good guy, that will create a system that will be transparent with no conflict of interest, with no hidden fees, and people will start banking with banks of this type, and more and more banks will have to compete.”
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