Dichotomy of dishonesty

Behavioral economist Dan Ariely told a story, during the ACFE’s Leadership Summit last year, about eight-year-old Johnny who came home from school with a note from his teacher that said Johnny had stolen a pencil from the kid sitting next to him. “Johnny’s father is furious,” Ariely told the summit attendees. “ ‘This is terrible! This is awful! I can’t believe you did this. You’re grounded for two weeks. Just wait until your mother comes home. And besides, Johnny, you know very well that if you need a pencil all you need to do is say something, and I can bring you dozens of pencils from the office.’ "

Ariely says we smirk at this joke because we recognize the complexity of human dishonesty that is inherent to all of us. We’re all dishonest; we all cheat; we all rationalize, Ariely says. It’s just the degree, and how comfortable we feel about it.

Where does cheating and dishonesty come from? What is the human capacity for both honesty and dishonesty? What pushes employees to become fraudsters? “And, perhaps most important, is dishonesty largely restricted to a few bad apples, or is it a more widespread problem?” Ariely writes in his book, “The (Honest) Truth About Dishonesty: How We Lie to Everyone—Especially Ourselves.”

Ariely, who is the James B. Duke Professor of Psychology and Behavioral Economics at Duke University, is dedicated to answering these questions and others to help people live more sensible — if not rational — lives. His unusual experiments demonstrate profound ideas that fly in the face of common wisdom. Ariely’s research findings can help fraud examiners in deterring would-be fraudsters.

He’s a founding member of the Center for Advanced Hindsight, co-creator of the film documentary “(Dis)Honesty: The Truth About Lies,” and a three-time New York Times best-selling author. His books also include “Predictably Irrational, The Upside of Irrationality,” “Irrationally Yours,” “Payoff,” “Dollars and Sense” and “Amazing Decisions.”

In 2013, Bloomberg recognized Ariely on its list of the Top 50 Most Influential Thinkers. He also has a biweekly advice column in The Wall Street Journal called “Ask Ariely.” For more information about Ariely, see danariely.com.

Ariely recently spoke to Fraud Magazine. (Answers have been edited for brevity and clarity.)

FM: What compelled you to enter the field of behavioral economics?

I’m basically concerned with the gaps between where we are and where we should be. I’m concerned with the fact that we don’t deal very well with our money, health, honesty and hate. For each of those, I wonder, how do we fix it? The first step is understanding, which is what behavior economics is trying to do, and then propose some mechanisms for trying to solve these things. So, it comes really from a desire to make improvements.

FM: During the pandemic, are the physical distances that exist due to online classes and businesspeople working remotely a factor in increased cheating and fraud?

The physical distances that exist due to online classes and businesspeople working remotely factor in the increase of cheating and fraud — when you’re not looking somebody in the eyes. Would a person more likely return a wallet if they saw someone drop it in the street or if they didn’t? What if they met the person right before they dropped it? Distance allows us to not think about the consequences of our actions.

FM: You say that human beings basically try to do two things at the same time: (1) We want to be able to look in the mirror and feel good about ourselves. (2) We want to benefit from dishonesty. You say we can’t do both unless we rationalize our actions. We can cheat just a little bit and continue to think of ourselves as honest, wonderful people. What are some practical ways fraud examiners can put these principles into play when they’re looking for fraud?

For fraud examiners, the easiest approach is to say that there are good people and bad people. And the goal of fraud examiners is to find the bad people. And, of course, that’s true, but I think that this is too simple. And the idea that there are good people and bad people doesn’t take into account that people deteriorate over time.

FM: If you think about people who eventually are fraudsters, you have to ask yourself would they end up being fraudsters in any environment, or did the particular environment cause them to act this way? Is there some kind of interaction dynamic between a person and their environment?

I think the answer is more of the second — that fraudsters develop to be fraudsters over time. What does that mean? It means that our goal is not just to find them when they’ve committed a big fraud, but the idea is that fraud examiners should expand their activity and look at early signs of people starting to act in inappropriate ways.

We want to look at the places where people are committing crimes in small steps that could later become large frauds. Fraud examiners need to look at systems and not just individuals and ask, “What are the systems that are more likely to create fraudsters over time?"

You know if you think about something outside of a fraudster’s role, say if you think about something like sexual misconduct, you can ask yourself, “Are all people potentially sexual predators?” And the answer is probably yes. If they’re put in the wrong environment for a long time probably lots and lots of men could become sexual predators.

So, we could do two things. We could wait until people become immoral in some way, or we could look at the system early on and try to prevent it. The message from this is to say that the path is a slippery slope, and we should look at things early before they become too big — prevention rather than catching people — and the second is to try to figure out what we can improve about the system.

FM: Why do you think that people don’t necessarily think about cost/benefit analyses when they’re faced with ethical decisions? What happens in U.S. states that have the death penalty? Do people commit less crime that they could get a death penalty for?

You would think that if people do the cost/benefit analysis they would come home at night, get angry with a significant other, take out a big knife and then say, “Oops, I forgot we have a death penalty. Let’s not do it.” But the reality is that those states that have the death penalty don’t have a lower rate of crime than those states that do.

When do we ever consider the cost/benefit analysis? The answer is probably almost never. In our experiments we don’t find much evidence for that. It seems like that’s what people should be doing, but our data doesn’t support it, and our personal experiences don’t support it.

FM: In your ACFE Leadership Summit message, you said that we could increase honesty in society by: (1) reducing conflicts of interest (2) decreasing rationalization (3) preventing the “slippery slope.” Can you provide some practical ways organizations can do that to deter and prevent fraud? What’s your definition of the slippery slope, and how do fraudsters slide down it?

The slippery slope is taking one step in the wrong direction. I’ll give you an example. A gas company I worked with was dealing with gas leaks. They wanted employees to always wear their safety equipment, but they also told them it was fine if they had to park illegally during a service call. The message was that if they’re hurrying to a job they could park illegally, and the employees heard that urgency is more important than anything else.

So, the employees started cutting corners in all kinds of things, including their own safety equipment. And then it was easier to cut corners the second time. They were on the slippery slope. They had the conflict between getting the job done quickly and doing it right. Once the company gave them permission, they could rationalize their behavior and then move on.

FM: Can you describe the “what-the-hell effect”?

The what-the-hell effect is a version of a slippery slope where after one bad step, people say, “what the hell” and continue in the bad behavior. An intuitive example for this could be those who are on a very strict diet. They start one day, but then another day they have a muffin. What you see happening is that they basically say to themselves, “I’m not a dieter anymore. I might as well enjoy the muffin.” So, they end up eating a lot of food for the rest of the day.

Now they can start again the next day or the next week or the first of the month. But for a period, they think of themselves as bad people and just go ahead and act in “a bad way.” The idea of the what-the-hell effect is that when the standards of ethics become such that people define themselves by this activity — I’m either a good person or a bad person — the more strict these lines are. And this is a good thing because it helps keep the rules. If you say, “I’m a good person and therefore I behave this way,” that’s very good in terms of helping keep the behavior.

But it turns out the same thing that helps keep the behavior also helps make it backfire when things go wrong. As long as I say to myself, good dieters don’t eat muffins, and I define myself this way, that’s helping me not eat a muffin. However, the moment I eat a muffin now, because of our definition of the self and identity, then it backfires. So, the point is that when we define things in relation to our identity, it has good points and bad points. The good point is that it does help maintain the good behavior. The bad point is that when the good behavior fails and people act in a bad way then there’s the opportunity for what-the-hell effect, which of course can be very devastating.

FM: What’s your favorite experiment that shows rationalization?

My favorite experiment is probably the one that shows that creative people cheat more. Creative people are able to tell better stories. They’re better able to balance these two goals: I want to think of myself as a good person, but I want to benefit from dishonesty. Creative people can come up with good stories about why what they were doing is actually okay.

FM: Can you explain the implications of Catholic confession to increase honesty and practical ways to apply this in the business world? What was the research behind this principle?

Catholic confession is connected to the what-the-hell effect. The idea is that if we think of ourselves as bad people, in the Catholic sense, if we think that we’re going to hell, we might as well enjoy it. Why would you stop? Why would you behave well? But something like confession, or its equivalent, helps you turn a new page and begin fresh. That’s incredibly important. We recreate that in  the civil world by, for example, renewing our wedding vows. Or we take a once-a-year honesty pledge — that could be a mechanism for forgiveness for politicians and businesspeople.

FM: Can you explain the Robin Hood syndrome of cheating?

When people are cheating for a favorite charity, they cheat more than they cheat for themselves. When people cheat for the purpose of the group of people that they work with, they cheat more. When people cheat for a group of people that they like, they cheat more. We can often justify cheating to a higher degree.

FM: What advice can you give fraud examiners in the trenches as they try to apply these principles?

I think we need to separate the act of detecting people who’ve committed big frauds and preventing fraud from the beginning. And to prevent fraud I think we need to understand that we’re not dealing with fraudsters — we’re dealing with people who can become fraudsters. Fraud examiners’ jobs in many ways is not to just catch the people after they do it but to prevent it from the beginning. For that, we need to understand the psychology of the fraudster and their environments in a deeper way.

Read "Testing our ‘fudge factor’ for dishonesty" at the end of this article.

Dick Carozza, CFE, is editor-in-chief emeritus of Fraud Magazine. Contact him at dcarozza@ACFE.com.

Testing our ‘fudge factor’ for dishonesty

Behavioral economist Dan Ariely once conducted an experiment to test the supposition that by increasing the psychological distance between a dishonest act and its consequence — the “fudge factor” — the participants would cheat more. But the results highlighted nuanced rationalization.

As he recounts in his book, “The (Honest) Truth About Dishonesty: How We Lie to Everyone—Especially Ourselves,” Ariely and his academic colleagues, Nina Mazar (now a professor at Boston University) and On Amir (a professor at the University of California-San Diego), thought certain types of activities could easily loosen moral standards.

To test this idea, Ariely sneaked into a Massachusetts Institute of Technology dorm (he was then an MIT professor) and placed into communal refrigerators two tempting baits. “In half of the refrigerators, I placed six-packs of Coca-Cola; in the others, I slipped a paper plate with six $1 bills on it,” he writes.

Ariely periodically visited the refrigerators to check on the baits. Within 72 hours, all the Cokes were gone, but no one touched the bills. “This little experiment suggests that we human beings are ready and willing to steal something that does not explicitly reference monetary values—that is, something that lacks the face of a dead president,” Ariely writes.

“However, we shy away from directly stealing money to an extent that would make even the most pious Sunday school teacher proud,” he writes. “Similarly, we might take some paper from work to use in our home printer, but it would be highly unlikely that we would ever take $3.50 from the petty-cash box, even if we turned right around and used the money to buy paper for our home printer.”