Human dishonesty needs to be investigated using the lens of behavioural biases. For most people, honest behaviour is less of a rational choice and more a function of psychological and environmental forces. Ariely argues that the factors driving dishonesty could be as simple as conflict of interest or even tiredness.
Convenience can sometimes backfire. With auto-locking doors it often does. Usually, I share a spare key with my friend but the last time my house door slammed shut behind me, my friend wasn’t available and I had to call a locksmith to open the door. I thought he would bring a large toolkit of sophisticated instruments and perhaps take his sweet time to open the door. To my surprise, all it took him was a thick piece of plastic sheet to pick the lock in 15 seconds.
“If it’s so easy to hack this lock then I should get a better and safer lock. Isn’t it?” I asked the locksmith.
“Sir, there’s hardly any lock that an expert locksmith can’t open.” He told me.
So why should anyone bother locking their doors? The surprising answer to that question is – “Locks are on doors only to keep the honest people honest.” This shocking sentence has a lot of wisdom in it. What if I told you that one percent of people will always be honest and never steal. Another one percent will always be dishonest and always try to pick your lock and steal. And the rest will be honest as long as the conditions are right – but if they are tempted enough, they’ll be dishonest too.
[show_to accesslevel=’almanack’] That’s not my idea. This disturbing insight comes from Dan Ariely’s book – The Honest Truth About Dishonesty. It’s disturbing because it means I might be overestimating how honest I am. A scary thought, isn’t it?
Dan Ariely teaches psychology and behavioural economics at Duke University. He has an unusual way of looking at things which is quite evident from the way he designs his psychology experiments to gain insights on human behaviour. The topic of psychological biases and human irrationality isn’t a new one but what Ariely has done is shift a lot of the thinking developed by such pioneers as Kahneman & Tversky who worked in behavioural economics, and moved it into the everyday sphere.
The Honest Truth About Dishonesty has deep insights based on different studies and research related to the dishonesty of humans in day to day life.
Is dishonesty largely restricted to a few bad apples, or is it a more widespread problem?…If only a few bad apples are responsible for most of the cheating in the world, we might easily be able to remedy the problem…But if the problem is not confined to a few outliers, that would mean that anyone could behave dishonestly at work and at home – you and I included. And if we all have the potential to be somewhat criminal, it is crucially important that we first understand how dishonesty operates and then figure out ways to contain and control this aspect of our nature.
Dishonesty and Irrationality
In most Hollywood movies, the bad guy seems to have valid reasons for committing a crime. A good director makes sure that the audience relates to the villain’s past experiences and sympathize with his behaviour to some extent. This worldview is driven by the school of thought known as Simple Model of Rational Crime (SMORC). It says that decisions about dishonesty, like most other decisions, are based on cost-benefit analysis. So people indulging in dishonesty/cheating know the chances of getting caught and its consequences. But they choose to go ahead because they calculate that the upside is much bigger than the possible downside. However, SMORC doesn’t explain everything.
…the rational cost-benefit forces that are presumed to derive dishonest behaviour but often do not, and the irrational forces that we think don’t matter but often do…when a large amount of money goes missing, we usually think it’s the work of one cold hearted criminal…But cheating is not necessarily due to one guy doing a cost-benefit analysis and stealing a lot of money. Instead, it is more often an outcome of many people who quietly justify taking a little bit of cash or a little bit of merchandise over and over…people don’t need to be corrupt in order to act in problematic and sometimes damaging ways. Perfectly well-meaning people can get tripped up by the quirks of the human mind, make egregious mistakes, and still consider themselves to be good and moral.
Put simply, the dishonest behaviour needs to be investigated using the lens of behavioural biases. For most people, honest behaviour is less of a rational choice and more a function of psychological and environmental forces. Ariely argues that the biggest factors driving dishonesty are unlikely candidates like a conflict of interest, counterfeits, pledges, creativity, and simply being tired.
The Invisible Effect of Incentives
Modern medicine has steadily increased the longevity for humans. In spite of that medical profession is notorious for malpractices. But doctors don’t exploit their patients deliberately. It’s the incentives that subtly nudge them to step over the line separating honesty and dishonesty.
When a dentist decides to purchase a new device, he no doubt believes it will help him better serve his patients. But it can also be an expensive venture. He wants to use it to improve patient care, but he also wants to recover his investment by charging his patients for using this wonderful new technology. So, consciously or not, he looks for ways to do so, and voila! The patient ends up with a crown – sometimes necessary, other times not.
Incentives play a very crucial role, consciously or subconsciously, in decision making. Charlie Munger, Warren Buffett’s inimitable partner, says, “I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. Never a year passes that I don’t get some surprise that pushes my limit a little farther.”
The incentive structure is very important in predicting the vulnerability of people towards dishonest behaviour. The unethical conduct that created the financial mess in 2008 was largely an outcome of perverse incentives. When your financial advisor peddles a toxic financial product, chances are that he isn’t doing it intentionally. He wholeheartedly believes in the merit of his product but that belief comes from the commissions he stands to make from the sale. Sam Walton, the creator of Wal-Mart stores understood this very well. He strictly prohibited any gift acceptance from any vendor, not even a handkerchief. This practice was popularly known as Sam Walton’s handkerchief rule.
The lesson here is one needs to be extremely careful while accepting any kind of favours or gifts. Accepting a favour from someone creates a subconscious feeling of obligation and the human mind is hardwired to reciprocate such favours. This urge to reciprocate could become the precursor to dishonesty.
Many empirical studies have shown that we have a limited quota of willpower for each day. Resisting a temptation taxes the willpower muscle. So if you spend a day suppressing your desires, your willpower stock depletes.
Being human and susceptible to temptation, we all suffer in this regard. When we make complex decisions throughout the day, we repeatedly find ourselves in circumstances that create a tug-of-war between impulse and reason…Ironically, simple everyday attempts to keep our impulse under control weaken our supply of self-control, thus making us more susceptible to temptation.
It’s also known as ego-depletion and it not only takes away our reasoning power but can also weaken our morality muscle. Which means in an ego-depleted state our moral guard is lowered and odds of indulging in dishonesty increases drastically.
It takes willpower to admit and disclose all your sources of income. So the lesson here is to never file your taxes at the end of the day when you are tired and mentally exhausted.
We humans are storytelling creatures by nature. And most creative and believable stories are the ones which we tell ourselves. We may not always know the reason behind our motivations to do certain things but that doesn’t stop us from creating perfectly logical-sounding reasons for our actions, decisions, and feelings.
…we human beings are torn by a fundamental conflict – our deeply ingrained propensity to lie to ourselves and to others, and the desire to think of ourselves as good and honest people. So we justify our dishonesty by telling ourselves stories about why our actions are acceptable and sometimes even admirable. Indeed, we’re pretty skilled at pulling the wool over our own eyes.
What separates humans from animals is our ability to imagine. We have no troubles in concocting fiction, talking about it and then believing in it. This unique ability has served the human race very well. It enabled us to envision novel solutions to tough problems, writes Ariely, “it can also enable us to develop original paths around rules, all the while allowing us to reinterpret information in self-serving way. Putting our creative minds to work can help us come up with a narrative that lets us have our cake and eat it too, and create stories in which we’re always the hero, never the villain.”
In a commencement speech at CalTech in 1974, the physicist Richard Feynman rightly said, “The first principle is that you must not fool yourself – and you are the easiest person to fool.”
Dishonesty is Contagious
We have innumerable bacteria in our bodies. Most of these microorganisms are harmless and some are even essential for the functioning of our biological machinery. However, among the good bacteria, there are few harmful ones also. But as long as the bad bacteria are present in limited number, we manage well. The problem comes when a healthy body is exposed to an environment where bad microorganisms (virus, bacteria etc.) have a high concentration. That’s when the natural balance of the body is disturbed and we fall sick. There’s a remarkable similarity between contagious disease and spread of dishonest behaviour.
If we see a colleague walking out of the office supply room with a handful of pens, for example, do we immediately start thinking that it’s all right to follow in his footsteps and grab some office supplies ourselves? I suspect that this is not the case. Instead, much like our relationship with bacteria, there might be a slower and more subtle process of accretion: perhaps when we see someone cheat, a microscopic impression is left with us and we become ever so slightly more corrupt. Then, the next time we witness unethical behaviour, our own morality erodes further, and we become more and more compromised as the number of immoral “germs” to which we are exposed increases.
I think Ariely’s hypothesis is confirmed by Gresham’s law. It states that in any system, bad behaviour/policies/people replace the good ones.
Social proof has an interesting role to play in promoting as well as in curbing dishonesty. Ariely writes –
[Cheating] is infectious and can be increased by observing the bad behaviour of others around us. Specifically, it seems that the social forces around us work in two different ways: When the cheater is part of our social group, we identify with that person and, as a consequence, feel that cheating is more socially acceptable.
But when the person cheating is an outsider, it is harder to justify our misbehaviour, and we become more ethical out of a desire to distance ourselves from that immoral person and from that other (much less moral) out-group.
So the honest truth about dishonesty is – We’re mostly honest, as long as the conditions are right. It’s sad but true. Another great insight that I took away from this book is how prevalent mild cheating is and how much more harmful it can be, cumulatively, compared to outright fraud.
Ariely’s book is scary, fascinating, funny and above all very useful. In fact, more than anything this book is a how-to guide on our own dishonesty. There’s much more in the book than what I have covered above and I highly recommend you read it.
Dan is both an astute researcher and a great writer. He deserves a lot of credit for transforming the academic studies about human biases into interesting and entertaining text. His earlier books Predictably Irrational and The Upside of Irrationality are must read for all investors.[/show_to] [hide_from accesslevel=’almanack’]
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