Volkswagen, the world’s third largest in terms of vehicle sales, recently admitted to cheating on emissions data for 11 million of its diesel engine cars sold between 2009 and 2015.
As I was explaining the scandal to my daughter, the first question she asked was – “Why do they do such wrong things, Papa? Aren’t they already rich?”
“Good question Kavya,” I said. “It’s especially good to know that you understand what they did i.e., cheat their customers, was wrong.”
“But they are good people, right Papa?” she asked.
“Yes the people who created the scandal must have come from good families,” I replied, “…and must have been good with their family and friends.”
“So why good people do bad things?” she asked again, this time combining all her questions into one.
“Let me tell you a story, Kavya,” I said, “…story of a young girl named Barbie.”
“Wow, Barbie is my favorite doll,” she exclaimed with a smile.
“Yeah, but for the time being, let’s forget that she is a doll and let’s focus on the story.”
“So the story goes back 20 years, when Barbie was a young girl, and the only daughter of her parents. Her parents were hard-working people and cared a lot about her. She was brought up with great care and love, and the right set of moral values like honesty, compassion, patience, and discipline. Barbie was among the brightest in her school and was loved by her teachers.”
“Like my teachers love me!” Kavya said.
“Yes dear,” I said. “And like you, she wanted to become a businesswoman when she grew up.”
“Wow!” she exclaimed.
“So she studied hard through school and college, and pursued her MBA from a reputed college.”
“Is MBA necessary to start a business, Papa?” Kavya asked.
“Not at all!” I replied, “But Barbie still went ahead and did her MBA, and then launched her business.”
“What business did she start?” Kavya asked.
“What business would you like to start when you grow up?” I asked back.
“Hmmm, I want to start a school for small children,” she replied.
“Wonderful! You know what, even Barbie started a playschool along with a partner, her college friend Jennie. She borrowed some money from her parents, and also used some of her savings to start the school. Even Jennie added some of her savings to the business.”
“Her parents must be so proud of her, right?” Kavya asked.
“Of course dear!” I said, “Like we are so proud of you!
“Anyways, Barbie’s school was doing reasonably well for the first one year, so she wanted to expand her business by opening another such school, but on a bigger scale. But there was a problem!”
“What?” Kavya interrupted. “She did not have money to start a big school?”
“You’re on the spot, Kavya! She was short of cash to start a bigger school. Even Jennie did not have more savings to put into the business. Their first school was doing reasonable, but because it was new in a market full of other such schools, they were yet to get a lot of students and thus were still making losses.”
“What’s a loss, Papa?” asked Kavya.
“Well, when you earn Rs 100 as school fee from students, but have to spend Rs 150 on running the school, the extra Rs 50 you have to spend from your own pocket is a loss for the business.
“So, Barbie’s first school was into minor losses but she wanted to expand to a neighborhood where there were no good playschools.”
“Where did they get money from?” asked Kavya.
“They went to a bank to get a loan of Rs 5 lac, but because their business was into losses, a few banks rejected her loan request.”
“What did she do then?” Kavya got concerned by now. “What about her parents?”
“Well, this Rs 5 lac she wanted to borrow from the bank was after some money her parents had promised to give. But then, the banks refused her request. It’s then that her partner Jennie proposed an idea…”
“What was that?” Kavya got excited.
“Jennie said that she had seen her father borrow money from banks, and maybe he can help them out in some way. So the two of them met Jennie’s father, who proposed something that Barbie did not like.”
“And what was that?” Kavya got even more excited now.
“To cheat the bank by giving them false information about their business…”
“Well, a bank will not give you money when you are making losses in your business, but not when you are making profits.”
“But Barbie’s business was making losses, right?”
“Yes, and thus Jennie’s father suggested that they give false information to the bank that their business was making profits and not losses.”
“Oh, is that possible?” Kavya asked with amazement.
“Yes dear. It’s very wrong to do so, but people still do such things by bending laws. Anyways, Barbie was against indulging in such an act, but was convinced by Jennie into doing this just one time and never again.”
“How could she?” Kavya asked. “All these years, Barbie’s parents had taught her to be honest, right?”
“That’s true, Kavya. But then there are such situations in life when we are tested for whatever good morals like honesty we have learned while we grew up. And that’s where you get a chance to truly stand out from most other people who will easily fail such tests.”
Kavya was listening to me with rapt attention, and thus I continued.
“Jennie told Barbie that falsifying information to get the loan was just a small price to pay for a big thing i.e., to start a bigger school. And that they would never indulge in such acts of dishonesty again. Plus, she also mentioned that she had seen her father doing this several times in his own business, so it must not be such a wrong thing to do anyways.
“This is called Social Proof Tendency, where people look at what others are doing to justify their own actions. In other words, if a lot of other kids are consuming junk food around you, you will consider eating junk to be the right thing to do.”
“But I don’t eat junk food, Papa!”
“Yes, my dear…and that’s so nice of you. Anyways, let me get back to Barbie. She feared that her parents would not allow her to do such a dishonest thing of lying to her bank, so she did not disclose all this to them. And thus she, with the help of Jennie and her father, submitted false information to a new bank they approached for loan.”
“And she got the loan?” Kavya asked.
“Yes she did!” I replied.
“Barbie must have felt so bad doing all this!” Kavya said.
“Yes, at first she felt bad about what she had done. But then when her new school started, she almost forgot about it and was instead happy to see her business growing. In fact, she started to realize that what she and Jennie did to get the bank loan was in fact the right thing to do because it had helped her grow the business.
“And this is one reason many good business people do bad things – because they are thinking from their business point of view (“How can I grow my business?” and “What will I gain when I do this?”) and not from an ethical point of view (“Are my actions fair and honest?” and “Am I doing something wrong to grow my business?”).
“Now Kavya, this should not be an excuse for you to do wrong things when you grow up to run your own business, but that is how many people think – “What’s in it for me?” And in answering this question, they would often choose dishonesty thinking that it’s just a small price to pay for a big future gain, and that they would never repeat such a thing.”
“But aren’t grown-ups able to differentiate between good and bad?” Kavya asked.
“It’s not about differentiating between good and bad, Kavya. People who indulge in such dishonest acts are genuinely unaware that they are being dishonest. They are not dishonest people, it’s just that they are not able to see their dishonesty.”
“Is that really so?” asked Kavya.
“Yes dear. Consider what the Volkswagen’s managers would have been thinking while conducting their fraud – “We sell almost 10 million vehicles every year, but are losing market share to other companies like Toyota and Honda. What can we do to sell more vehicles? What additional can we offer to customers?”
“Some among their managers would have suggested – “Let’s sell our cars saying that they are more environment friendly than other cars.”
“But they are not!” some other guys would have said. “That’s what we know, but what if we can do something to show the regulators that our cars emit less of poisonous gases than other cars….we can sell more cars in the future. And we can try doing this just for a year and see how it goes.”
“So, like Jennie who asked Barbie to be dishonest with the bank just once for the sake of their business, even Volkswagen’s managers would have told their CEO, and he would have agreed assuming that this was a small price to pay for big profits in the future.”
Kavya was still attentive to what I was saying, and thus I did not stop. It was also a time for me to rack my brain to think through what really makes good people do bad things.
“And then, the Volkswagen CEO must be thinking about his business (“What would we gain from it? Higher market share and higher profits, and higher salaries and bonuses”) instead of ethically (“What damage would we do to the environment by selling cars that release lot of poisonous gases? The answer is not clear, so it’s okay to do what we are doing.”)
“Okay, but Barbie must not have been dishonest after that one bad thing she did, right?” Kavya asked.
“Well, how I wished so Kavya. But that is where things gets interesting. When people indulge in small, wrongful acts…and don’t get punished for that…and instead benefit out of those…it nudges them towards similar but bigger acts in the future.
“So when Volkswagen started to see rising sales by lying about environment friendliness of their cars, and their managers started getting better salaries and bonuses, they would have done more of such lying, believing that this could help them continue to gain market share, and earn higher profits and salaries. And this brings me to another reason how small acts of dishonesty becomes big…and it’s called the Slow Contrast Effect.”
“What’s that?” Kavya asked.
“When things change gradually, you don’t notice the changes. Like, do you remember how you formed the habit of waking up early?”
“Yes Papa! As you suggested, I started waking up two minutes earlier than normal, then two more minutes, and then two more…and gradually I was waking up an hour earlier than my earlier time.”
“That’s right! In the same way, business people become dishonest to first earn, say, Rs 100 of extra profit…and then more dishonest to earn an extra Rs 200…and then an extra Rs 300. And they don’t notice that they are gradually becoming more and more dishonest…till they find themselves in the jail.
“Plus, even people around them do not notice such acts of dishonesty and, even when some notice, they ignore thinking that it was just a small, wrongful act…and that the dishonest person will change for the better in the future. But then, as the legendary investor Warren Buffett said, “Chains of habit are too light to be felt until they are too heavy to be broken.”
“Hey, you told me this earlier,” Kavya said, “But I forgot what it means.”
“It means you must choose your habits wisely when you are young, because it is very difficult to change habits once you are old. It’s due to the Commitment and Consistency Tendency, which simply means that we remain committed and consistent with how we have behaved in the past.
“In other words, if you build good habits when you are young, like waking up early and brushing your teeth twice, you will most likely carry those habits throughout your life because you will be committed towards the same. On the other hand, even your bad habits – like not keeping your things at proper places or biting your fingernails – continue for life and it’s very difficult to break them.
“And this is also what happened to Barbie who, along with her partner Jennie, indulged in giving false information to the bank again, when they wanted to open their third school. And this time, their business was losing more money and they wanted a bigger loan. What is more, since she had more people managing her school now, there were more people involved in this act of dishonesty. So their dishonesty just took a bigger shape.
“And that gets me to another reason such crimes become bigger when more people working together are involved.”
“How come, Papa?” asked Kavya.
“Because people who work with each other usually tend to start liking each other. And you will always want to help people you like, right?”
“Yes Papa, that’s right.”
“So, in the same way, people who were working with Barbie and who started liking her, did not mind covering up on her wrongdoings. In fact, because they were helping Barbie cover up, they really did not see what she was doing as unethical.
“This is thanks to the Liking Tendency, due to which we ignore the faults of other people we like or admire. This is exactly why people working with the Volkswagen CEO must have helped him in the fraud.
“And then, there’s this feeling of empathy towards the person committing the crime, especially when the person is from a similar background as us, or when she looks or talks or just feels like us.”
“Is that really so, Papa?”
“Yes Kavya. Tell me who is your favourite actor?”
“You know that…it’s Shahrukh Khan. But why are you asking this?”
“And why is he your favourite?”
“Because he is a nice actor, and…”
“And because his birthday is on the same day as yours, right?”
“Yes Papa!” Kavya said with a smile.
“So see, we also like people who share their birth dates with us. And we empathize with them. In fact, there’s a study done in the US where the chance of a mid-range car passing the air pollution test is greater than that of a high-end car like a BMW or Ferrari. Why? Because the testers, who are middle-class people earning modest salaries, are more likely to empathize with the owners of a mid-range car than those who own the luxury ones. And I’m sure this must be going on in the minds of Volkswagen executives too, given that the company mostly sells high-end cars.
“And, by the way, when an organization has more and more dishonest people, it drives out the good people away from that place. It’s called Gresham’s Law.”
“What’s Gresham’s Law, Papa?”
“Well, this law states that the bad values or bad people have a tendency to drive out the good from a system. So a little dishonesty will grow on its own and slowly the whole company gets full of like-minded i.e., dishonest people.”
“Papa, I can understand now why good people do bad things and for a long period of time, but then what happened to Barbie?”
“Oh, she remained committed to what she was doing – acts of dishonesty – because it did not seem a big deal anymore and she was happier seeing her business grow in size. So her incentives (what she was gaining out of her actions i.e., more, bigger schools and thus more income) drove her more than her actions (what she was doing for such gains).
“This brings me to another common tendency of us humans called Incentive-Caused Bias, which suggests that we are more driven by what we gain out of our actions (like, more money) than our actions. And that is why so many students cheat during their examinations. They are so much driven by the potential to earn better grades through cheating that they ignore that cheating is bad. And that was true of Barbie as well, which led her to become more dishonest as years passed…because her business was growing.
“But then, Mr. Buffett says that when the tide goes out, you can see who is swimming naked.”
“How do you explain that, Papa?”
“Well, it so happened that some of Barbie’s competitors sensed something wrong in the way she was conducting business and they complained to the bank that had lent money to her in the past. As a result, the bank sent its representatives to investigate her school’s accounts and found out the wrongdoings she had done over the years.”
“What happened then?” Kavya asked restlessly, looking at the Barbie doll lying in her room’s showcase.
“Well, the bank put her on notice and asked to refund all money it had lent for her business. But because she did not have so much money to repay, she had to sell all her school properties to collect and give back the borrowed amount.”
“Oh! She lost everything she had worked hard to create all these years?” Kavya asked.
“Yes Kavya. And not just money and her school, she also lost her reputation. Even her friends did not trust her anymore. Her parents were also very disturbed for what their daughter had done, despite their good upbringing.
“You know Kavya, lose anything in life but never lose your integrity and reputation. Know what can get you into trouble and then never do that thing…even if you believe that you will not do it again in life. Remember what I told you about chains of habit – you don’t feel them when you are young, but you won’t be able to break them once you’re old. So build good habits, and do it very gradually.
“As you grow up, you will find a lot of people around you justify their bad behaviour in a variety of ways. This happens when people begin to focus on desired outcomes, and rationalize the means to achieve them. So if an outcome is important, we begin to believe that the ends justify the means, exactly like Barbie did. But such justification is a slippery slope that leads only to increases in bad behaviour.
“So, when you find others around you trying to justify their bad behaviour, and before it may lead you to behave badly yourself, ask a few questions like –
- Would I normally consider this action to be wrong?
- If I consider it wrong, why would I ever want to do it?
- If this wrong action would lead me to earn more money, is that money really worth it at the huge risk of getting deeper into the muddle and, in the process, destroying my reputation?
- Would I do such a thing if my parents or anyone else I respect was watching me?
- Should I do such a thing just because many people around me are doing the same? Couldn’t many people be wrong at the same time, like they have been earlier?
“Kavya, you just saw what happened with Barbie – her small acts of dishonesty became so big that she had to pay with everything she had worked hard to create over the years, and especially her reputation. If you can remember this story when you grow up, I am sure you would remain an honest girl like you are now and save yourself a lot of pain. Right?”
“Right Papa!” Kavya said, as I handed her a new Barbie doll I had brought for her…and with a hope that she won’t be one of those good people who do bad things.