Most economic models of human
behaviour start with the assumption that humans behave in a logical way to maximise self-interest. This is often, not borne out by experience. Gifting is an example of social behaviour which may not be optimal in an economic sense. When invited to the home of a friend, many of us would carry a gift - say a box of chocolates. It is likely that the host may not like it, may not be able (diabetes) or willing (fattening) to consume it. Value received by the host would, perhaps,be a fraction of what we spend for it. A “better” alternative, in an economic sense, would be to give a gift voucher that allows the host to purchase something that is of use to him. It would also be a gaffe of huge proportions. Dan Ariely is professor of Psychology and Behavioural Economics at Duke University. His research is focussed on answering questions on why humans behave “irrationally” and explaining conundrums like the above.Dishonesty is almost universal
One of questions that Dan investigated was how prone to cheating were people in general, or was cheating restricted to a small group of “bad apples”. One group, participating in an experiment to investigate this, was given a paper with a set of twenty questions. After five minutes, the papers were retrieved and based on the number of correct answers,participants were given $1 per correct answer. The average number of correct answers was 4.In another group, the same procedure was followed, except that the group was allowed to cheat. Instead of taking the paper back, the interviewer asked participants to shred the paper, and self-declare how many answers they got right. The average of correct answers (as declared) increased to 7! Interestingly, it wasn't that a few people cheated a lot and raised the average, most people cheated a little bit.
Another variation tested if cheating would vary with amount of money that could be made by cheating. Economic theory of rational behaviour would suggest that with no change in the probability of getting caught and punished, cheating would increase in proportion to the reward. What experiments proved though was that it was not the case. Most people continued to cheat a little bit. Dan explains it as a “personal fudge factor” - below a certain threshold, we are willing to benefit from cheating. Self-image does not allow the threshold to be breached.
The conclusions from the study (which had several other experiments - you can access the talk by Dan Ariely at http://tinyurl.com/cm6kcz) were:
1 Lots of people cheat, by a little bit
2 Reminding people of their morality reduces cheating
3 Cheating increased as the distance from money increased - for example where the gains made were not directly in the form of currency
4 Cheating increased when we see cheating around us - especially when it is done by others who are part of the “group”
Fallouts
This study explains somewhat the behaviour of market participants that led to the 2008 financial crisis in the western world. Bankers dealing in derivative securities did not see their act of passing off dud securities to clients as cheating - it was far removed from the underlying transaction. Since everyone was doing it, it was okay to participate.Closer home, the string of “scams” and increase in corruption over the past few years could be attributed to complexity of transactions and the perception that it is widespread. As a corporate leader once noted, scams earlier were limited to stealing visible public property - say cattle feed. The current set of cases relate to “stealing” air waves, allocating mineral rights, and other complex constructs - where “what is stolen” is itself difficult to define. This allows “no loss” claims to be made in an almost believable manner.
The silver lining
One of the questions that is pertinent today is-what would a new government do - assuming it had the electoral mandate to execute its plans without restraint - to energise the economy in the short to medium term. Most people would agree that reducing corruption would be high on the agenda. In fact, the emergence of a new political party on that platform and its rapid rise to power is demonstrative of the resonance this theme has with voters. However, is retribution the best way forward? Given the likely wide spread corruption involving both government and private sector, an exhaustive search to find and punish may actually lead to a further freeze in economic activity.Luckily, the studies above point out that all it may take to root out minor acts of corruption is removal of the demonstration effect and a reminder of morality. A wise leader would focus on prosecuting a few provable and marquee cases of corruption, while ignoring smaller transgressions. This in itself can result in a dramatic lowering in corruption in the near term. As the elections draw near and with it, hope of a new beginning, it may be well worth reminding our leaders - new and old: Chose your battles wisely. You haven't fought them all yet.
This article was originally published on April 17, 2014.
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