Video Transcript: What really motivates people to be honest in business

How many companies have you interacted with today? Well, you got up in the morning, took a shower, washed your hair, used a hair dryer, ate breakfast – ate cereals, fruit, yogurt, whatever – had coffee – tea. You took public transport to come here, or maybe used your private car. You interacted with the company that you work for or that you own. You interacted with your clients, your customers, and so on and so forth. I'm pretty sure there are at least seven companies you've interacted with today. Let me tell you a stunning statistic. One out of seven large, public corporations commit fraud every year. This is a US academic study that looks at US companies – I have no reason to believe that it's different in Europe. This is a study that looks at both detected and undetected fraud using statistical methods. This is not petty fraud. These frauds cost the shareholders of these companies, and therefore society, on the order of 380 billion dollars per year. We can all think of some examples, right? The car industry's secrets aren't quite so secret anymore. Fraud has become a feature, not a bug, of the financial services industry. That's not me who's claiming that, that's the president of the American Finance Association who stated that in his presidential address. That's a huge problem if you think about, especially, an economy like Switzerland, which relies so much on the trust put into its financial industry. On the other hand, there are six out of seven companies who actually remain honest despite all temptations to start engaging in fraud. There are whistle-blowers like Michael Woodford, who blew the whistle on Olympus. These whistle-blowers risk their careers, their friendships, to bring out the truth about their companies. There are journalists like Anna Politkovskaya who risk even their lives to report human rights violations. She got killed – every year, around 100 journalists get killed because of their conviction to bring out the truth. So in my talk today, I want to share with you some insights I've obtained and learned in the last 10 years of conducting research in this. I'm a researcher, a scientist working with economists, financial economists, ethicists, neuroscientists, lawyers and others trying to understand what makes humans tick, and how can we address this issue of fraud in corporations and therefore contribute to the improvement of the world. I want to start by sharing with you two very distinct visions of how people behave. First, meet Adam Smith, founding father of modern economics. His basic idea was that if everybody behaves in their own self-interests, that's good for everybody in the end. Self-interest isn't a narrowly defined concept just for your immediate utility. It has a long-run implication. Let's think about that. Think about this dog here. That might be us. There's this temptation – I apologize to all vegetarians, but – Dogs do like the bratwurst. Now, the straight-up, self-interested move here is to go for that. So my friend Adam here might jump up, get the sausage and thereby ruin all this beautiful tableware. But that's not what Adam Smith meant. He didn't mean disregard all consequences – to the contrary. He would have thought, well, there may be negative consequences, for example, the owner might be angry with the dog and the dog, anticipating that, might not behave in this way. That might be us, weighing the benefits and costs of our actions. How does that play out? Well, many of you, I'm sure, have in your companies, especially if it's a large company, a code of conduct. And then if you behave according to that code of conduct, that improves your chances of getting a bonus payment. And on the other hand, if you disregard it, then there are higher chances of not getting your bonus or its being diminished. In other words, this is a very economic motivation of trying to get people to be more honest, or more aligned with the corporation's principles. Similarly, reputation is a very powerful economic force, right? We try to build a reputation, maybe for being honest, because then people trust us more in the future. Right? Adam Smith talked about the baker who's not producing good bread out of his benevolence for those people who consume the bread, but because he wants to sell more future bread. In my research, we find, for example, at the University of Zurich, that Swiss banks who get caught up in media, and in the context, for example, of tax evasion, of tax fraud, have bad media coverage. They lose net new money in the future and therefore make lower profits. That's a very powerful reputational force. Benefits and costs. Here's another viewpoint of the world. Meet Immanuel Kant, 18th-century German philosopher superstar. He developed this notion that independent of the consequences, some actions are just right and some are just wrong. It's just wrong to lie, for example. So, meet my friend Immanuel here. He knows that the sausage is very tasty, but he's going to turn away because he's a good dog. He knows it's wrong to jump up and risk ruining all this beautiful tableware. If you believe that people are motivated like that, then all the stuff about incentives, all the stuff about code of conduct and bonus systems and so on, doesn't make a whole lot of sense. People are motivated by different values perhaps. So, what are people actually motivated by? These two gentlemen here have perfect hairdos, but they give us very different views of the world. What do we do with this? Well, I'm an economist and we conduct so-called experiments to address this issue. We strip away facts which are confusing in reality. Reality is so rich, there is so much going on, it's almost impossible to know what drives people's behavior really. So let's do a little experiment together. Imagine the following situation. You're in a room alone, not like here. There's a five-franc coin like the one I'm holding up right now in front of you. Here are your instructions: toss the coin four times, and then on a computer terminal in front of you, enter the number of times tails came up. This is the situation. Here's the rub. For every time that you announce that you had a tails throw, you get paid five francs. So if you say I had two tails throws, you get paid 10 francs. If you say you had zero, you get paid zero francs. If you say, "I had four tails throws," then you get paid 20 francs. It's anonymous, nobody's watching what you're doing, and you get paid that money anonymously. I've got two questions for you. You know what's coming now, right? First, how would you behave in that situation? The second, look to your left and look to your right – and think about how the person sitting next to you might behave in that situation. We did this experiment for real. We did it at the Manifesta art exhibition that took place here in Zurich recently, not with students in the lab at the university but with the real population, like you guys. First, a quick reminder of stats. If I throw the coin four times and it's a fair coin, then the probability that it comes up four times tails is 6.25 percent. And I hope you can intuitively see that the probability that all four of them are tails is much lower than if two of them are tails, right? Here are the specific numbers. Here's what happened. People did this experiment for real. Around 30 to 35 percent of people said, "Well, I had four tails throws." That's extremely unlikely. But the really amazing thing here, perhaps to an economist, is there are around 65 percent of people who did not say I had four tails throws, even though in that situation, nobody's watching you, the only consequence that's in place is you get more money if you say four than less. You leave 20 francs on the table by announcing zero. I don't know whether the other people all were honest or whether they also said a little bit higher or lower than what they did because it's anonymous. We only observed the distribution. But what I can tell you -- and here's another coin toss. There you go, it's tails. Don't check, OK? What I can tell you is that not everybody behaved like Adam Smith would have predicted. So what does that leave us with? Well, it seems people are motivated by certain intrinsic values and in our research, we look at this. We look at the idea that people have so-called protected values. A protected value isn't just any value. A protected value is a value where you're willing to pay a price to uphold that value. You're willing to pay a price to withstand the temptation to give in. And the consequence is you feel better if you earn money in a way that's consistent with your values. Let me show you this again in the metaphor of our beloved dog here. If we succeed in getting the sausage without violating our values, then the sausage tastes better. That's what our research shows. If, on the other hand, we do so – if we get the sausage and in doing so we actually violate values, we value the sausage less. Quantitatively, that's quite powerful. We can measure these protected values, for example, by a survey measure. Simple, nine-item survey that's quite predictive in these experiments. If you think about the average of the population and then there's a distribution around it – people are different, we all are different. People who have a set of protected values that's one standard deviation above the average, they discount money they receive by lying by about 25 percent. That means a dollar received when lying is worth to them only 75 cents without any incentives you put in place for them to behave honestly. It's their intrinsic motivation. By the way, I'm not a moral authority. I'm not saying I have all these beautiful values, right? But I'm interested in how people behave and how we can leverage that richness in human nature to actually improve the workings of our organizations. So there are two very, very different visions here. On the one hand, you can appeal to benefits and costs and try to get people to behave according to them. On the other hand, you can select people who have the values and the desirable characteristics, of course – competencies that go in line with your organization. I do not yet know where these protected values really come from. Is it nurture or is it nature? What I can tell you is that the distribution looks pretty similar for men and women. It looks pretty similar for those who had studied economics or those who had studied psychology. It looks even pretty similar around different age categories among adults. But I don't know yet how this develops over a lifetime. That will be the subject of future research. The idea I want to leave you with is it's all right to appeal to incentives. I'm an economist; I certainly believe in the fact that incentives work. But do think about selecting the right people rather than having people and then putting incentives in place. Selecting the right people with the right values may go a long way to saving a lot of trouble and a lot of money in your organizations. In other words, it will pay off to put people first. Thank you.