by Dan Ariely
Do you see what we were doing? Would the insertion of a token into the transaction—a piece of valueless, nonmonetary currency—affect the students’ honesty? Would the token make the students less honest in tallying their answers than the students who received cash immediately? If so, by how much?
Even we were surprised by the results: The participants in the first group (who had no way to cheat) solved an average of 3.5 questions correctly (they were our control group).
The participants in the second group, who tore up their worksheets, claimed to have correctly solved an average of 6.2 questions. Since we can assume that these students did not become smarter merely by tearing up their worksheets, we can attribute the 2.7 additional questions they claimed to have solved to cheating.
But in terms of brazen dishonesty, the participants in the third group took the cake. They were no smarter than the previous two groups, but they claimed to have solved an average of 9.4 problems—5.9 more than the control group and 3.2 more than the group that merely ripped up the worksheets.
This means that when given a chance to cheat under ordinary circumstances, the students cheated, on average, by 2.7 questions. But when they were given the same chance to cheat with nonmonetary currency, their cheating increased to 5.9—more than doubling in magnitude. What a difference there is in cheating for money versus cheating for something that is a step away from cash!
If that surprises you, consider this. Of the 2,000 participants in our studies of honesty (described in the previous chapter), only four ever claimed to have solved all the problems. In other words, the rate of “total cheating” was four in 2,000.*
But in the experiment in which we inserted nonmonetary currency (the token), 24 of the study’s 450 participants cheated “all the way.” How many of these 24 extreme cheaters were in the condition with money versus the condition with tokens? They were all in the token condition (24 of 150 students cheated “all the way” in this condition; this is equivalent to about 320 per 2,000 participants). This means that not only did the tokens “release” people from some of their moral constraints, but for quite a few of them, the extent of the release was so complete that they cheated as much as was possible.
This level of cheating is clearly bad, but it could have been worse. Let’s not forget that the tokens in our experiments were transformed into cash within a matter of seconds. What would the rate of dishonesty have been if the transfer from a nonmonetary token to cash took a few days, weeks, or months (as, for instance, in a stock option)? Would even more people cheat, and to a larger extent?
WE HAVE LEARNED that given a chance, people cheat. But what’s really odd is that most of us don’t see this coming. When we asked students in another experiment to predict if people would cheat more for tokens than for cash, the students said no, the amount of cheating would be the same. After all, they explained, the tokens represented real money—and the tokens were exchanged within seconds for actual cash. And so, they predicted, our participants would treat the tokens as real cash.
But how wrong they were! They didn’t see how fast we can rationalize our dishonesty when it is one step away from cash. Of course, their blindness is ours as well. Perhaps it’s why so much cheating goes on. Perhaps it’s why Jeff Skilling, Bernie Ebbers, and the entire roster of executives who have been prosecuted in recent years let themselves, and their companies, slide down the slope.
All of us are vulnerable to this weakness, of course. Think about all the insurance fraud that goes on. It is estimated that when consumers report losses on their homes and cars, they creatively stretch their claims by about 10 percent. (Of course, as soon as you report an exaggerated loss, the insurance company raises its rates, so the situation becomes tit for tat). Again it is not the case that there are many claims that are completely flagrant, but instead many people who have lost, say, a 27-inch television set report the loss of a 32-inch set; those who have lost a 32-inch set report the loss of a 36-inch set, and so on. These same people would be unlikely to steal money directly from the insurance companies (as tempting as that might sometimes be), but reporting what they no longer have—and increasing its size and value by just a little bit—makes the moral burden easier to bear.
There are other interesting practices. Have you ever heard the term “wardrobing”? Wardrobing is buying an item of clothing, wearing it for a while, and then returning it in such a state that the store has to accept it but can no longer resell it. By engaging in wardrobing, consumers are not directly stealing money from the company; instead, it is a dance of buying and returning, with many unclear transactions involved. But there is at least one clear consequence—the clothing industry estimates that its annual losses from wardrobing are about $16 billion (about the same amount as the estimated annual loss from home burglaries and automobile theft combined).
And how about expense reports? When people are on business trips, they are expected to know what the rules are, but expense reports too are one step, and sometimes even a few steps, removed from cash. In one study, Nina and I found that not all expenses are alike in terms of people’s ability to justify them as business expenses. For example, buying a mug for five dollars for an attractive stranger was clearly out of bounds, but buying the same stranger an eight-dollar drink in a bar was very easy to justify. The difference was not the cost of the item, or the fear of getting caught, but people’s ability to justify the item to themselves as a legitimate use of their expense account.
A few more investigations into expense accounts turned up similar rationalizations. In one study, we found that when people give receipts to their administrative assistants to submit, they are then one additional step removed from the dishonest act, and hence more likely to slip in questionable receipts. In another study, we found that businesspeople who live in New York are more likely to consider a gift for their kid as a business expense if they purchased it at the San Francisco airport (or someplace else far from home) than if they had purchased it at the New York airport, or on their way home from the airport. None of this makes logical sense, but when the medium of exchange is nonmonetary, our ability to rationalize increases by leaps and bounds.
I HAD MY own experience with dishonesty a few years ago. Someone broke into my Skype account (very cool online telephone software) and charged my PayPal account (an online payment system) a few hundred dollars for the service.
I don’t think the person who did this was a hardened criminal. From a criminal’s perspective, breaking into my account would most likely be a waste of time and talent because if this person was sufficiently smart to hack into Skype, he could probably have hacked into Amazon, Dell, or maybe even a credit card account, and gotten much more value for his time. Rather, I imagine that this person was a smart kid who had managed to hack into my account and who took advantage of this “free” communication by calling anyone who would talk to him until I managed to regain control of my account. He may have even seen this as a techie challenge—or maybe he is a student to whom I once gave a bad grade and who decided to tweak my nose for it.
Would this kid have taken cash from my wallet, even if he knew for sure that no one would ever catch him? Maybe, but I imagine that the answer is no. Instead, I suspect that there were some aspects of Skype and of how my account was set up that “helped” this person engage in this activity and not feel morally reprehensible: First, he stole calling time, not money. Next, he did not gain anything tangible from the transaction. Third, he stole from Skype rather than directly from me. Fourth, he might have imagined that at the end of the day Skype, not I, would cover the cost. Fifth, the cost of the calls was charged automatically to me via PayPal. So here we had another step in the process—and another level of fuzziness in terms of who would eventually pay for the calls. (Just in case you are wondering, I have since canceled this direct link to PayPal.)
Was this person stealing from me? Sure, but there were so many things that made the theft fuzzy that I really don’t think he thought of himself
as a dishonest guy. No cash was taken, right? And was anyone really hurt? This kind of thinking is worrisome. If my problem with Skype was indeed due to the nonmonetary nature of the transactions on Skype, this would mean that there is much more at risk here, including a wide range of online services, and perhaps even credit and debit cards. All these electronic transactions, with no physical exchange of money from hand to hand, might make it easier for people to be dishonest—without ever questioning or fully acknowledging the immorality of their actions.
THERE’S ANOTHER, SINISTER impression that I took out of our studies. In our experiments, the participants were smart, caring, honorable individuals, who for the most part had a clear limit to the amount of cheating they would undertake, even with nonmonetary currency like the tokens. For almost all of them, there was a point at which their conscience called for them to stop, and they did. Accordingly, the dishonesty that we saw in our experiments was probably the lower boundary of human dishonesty: the level of dishonesty practiced by individuals who want to be ethical and who want to see themselves as ethical—the so-called good people.
The scary thought is that if we did the experiments with nonmonetary currencies that were not as immediately convertible into money as tokens, or with individuals who cared less about their honesty, or with behavior that was not so publicly observable, we would most likely have found even higher levels of dishonesty. In other words, the level of deception we observed here is probably an underestimation of the level of deception we would find across a variety of circumstances and individuals.
Now suppose that you have a company or a division of a company led by a Gordon Gekko character who declares that “greed is good.” And suppose he used nonmonetary means of encouraging dishonesty. Can you see how such a swashbuckler could change the mind-set of people who in principle want to be honest and want to see themselves as honest, but also want to hold on to their jobs and get ahead in the world? It is under just such circumstances that nonmonetary currencies can lead us astray. They let us bypass our conscience and freely explore the benefits of dishonesty.
This view of human nature is worrisome. We can hope to surround ourselves with good, moral people, but we have to be realistic. Even good people are not immune to being partially blinded by their own minds. This blindness allows them to take actions that bypass their own moral standards on the road to financial rewards. In essence, motivation can play tricks on us whether or not we are good, moral people.
As the author and journalist Upton Sinclair once noted, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” We can now add the following thought: it is even more difficult to get a man to understand something when he is dealing with nonmonetary currencies.
THE PROBLEMS OF dishonesty, by the way, don’t apply just to individuals. In recent years we have seen business in general succumb to a lower standard of honesty. I’m not talking about big acts of dishonesty, like those perpetrated by Enron and Worldcom. I mean the small acts of dishonesty that are similar to swiping Cokes out of the refrigerator. There are companies out there, in other words, that aren’t stealing cash off our plates, so to speak, but are stealing things one step removed from cash.
There are plenty of examples. Recently, one of my friends, who had carefully saved up his frequent-flyer miles for a vacation, went to the airline who issued all these miles. He was told that all the dates he wanted were blacked out. In other words, although he had saved up 25,000 frequent-flyer miles, he couldn’t use them (and he tried many dates). But, the representative said, if he wanted to use 50,000 miles, there might be some seats. She checked. Sure, there were seats everywhere.
To be sure, there was probably some small print in the frequently-flyer brochure explaining that this was OK. But to my friend, the 25,000 miles he had earned represented a lot of money. Let’s say it was $450. Would this airline have mugged him for that amount of cash? Would the airline have swiped it from his bank account? No. But because it was one step removed, the airline stole it from him in the form of requiring 25,000 additional miles.
For another example, look at what banks are doing with credit card rates. Consider what is called two-cycle billing. There are several variations of this trick, but the basic idea is that the moment you don’t pay your bill in full, the credit issuer will not only charge a high interest rate on new purchases, but will actually reach into the past and charge interest on past purchases as well. When the Senate banking committee looked into this recently, it heard plenty of testimony that certainly made the banks look dishonest. For instance, a man in Ohio who charged $3,200 to his card soon found his debt to be $10,700 because of penalties, fees, and interest.
These were not boiler-room operators charging high interest rates and fees, but some of the biggest and presumably most reputable banks in America—those whose advertising campaigns would make you believe that you and the bank were “family.” Would a family member steal your wallet? No. But these banks, with a transaction somewhat removed from cash, apparently would.
Once you view dishonesty through this lens, it is clear that you can’t open a newspaper in the morning without seeing new examples to add.
AND SO WE return to our original observation: isn’t cash strange? When we deal with money, we are primed to think about our actions as if we had just signed an honor code. If you look at a dollar bill, in fact, it seems to have been designed to conjure up a contract: THE UNITED STATES OF AMERICA, it says in prominent type, with a shadow beneath that makes it seem three-dimensional. And there is George Washington himself (and we all know that he could never tell a lie). And then, on the back, it gets even more serious: IN GOD WE TRUST, it says. And then we’ve got that weird pyramid, and on top, that unblinking eye! And it’s looking right at us! In addition to all this symbolism, the sanctity of money could also be aided by the fact that money is a clear unit of exchange. It’s hard to say that a dime is not a dime, or a buck isn’t a buck.
But look at the latitude we have with nonmonetary exchanges. There’s always a convenient rationale. We can take a pencil from work, a Coke from the fridge—we can even backdate our stock options—and find a story to explain it all. We can be dishonest without thinking of ourselves as dishonest. We can steal while our conscience is apparently fast asleep.
How can we fix this? We could label each item in the supply cabinet with a price, for instance, or use wording that explains stocks and stock options clearly in terms of their monetary value. But in the larger context, we need to wake up to the connection between nonmonetary currency and our tendency to cheat. We need to recognize that once cash is a step away, we will cheat by a factor bigger than we could ever imagine. We need to wake up to this—individually and as a nation, and do it soon.
Why? For one thing, the days of cash are coming to a close. Cash is a drag on the profits of banks—they want to get rid of it. On the other hand, electronic instruments are very profitable. Profits from credit cards in the United States rose from $9 billion in 1996 to a record $27 billion in 2004. By 2010, banking analysts say, there will be $50 billion in new electronic transactions, nearly twice the number processed under the Visa and MasterCard brands in 2004.30 The question, therefore, is how we can control our tendency to cheat when we are brought to our senses only by the sight of cash—and what we can do now that cash is going away.
Willie Sutton allegedly said that he robbed banks because that’s where the money was. By that logic he might be writing the fine print for a credit card company today or penciling in blackout dates for an airline. It might not be where the cash is, but it’s certainly where you will find the money.
CHAPTER 15
Beer and Free Lunches
What Is Behavioral Economics, and Where
Are the Free Lunches?
The Carolina Brewery is a hip bar on Franklin Street, the main street outside the University of North Carolina at Chapel Hill. A beautiful street with brick buildings and old trees, i
t has many restaurants, bars, and coffee shops—more than one would expect to find in a small town.
As you open the doors to the Carolina Brewery, you see an old building with high ceilings and exposed beams, and a few large stainless steel beer containers that promise a good time. There are semiprivate tables scattered around. This is a favorite place for students as well as for an older crowd to enjoy good beer and food.
Soon after I joined MIT, Jonathan Levav (a professor at Columbia) and I were mulling over the kinds of questions one might conjure up in such a pleasant pub. First, does the sequential process of taking orders (asking each person in turn to state his or her order) influence the choices that the people sitting around the table ultimately make? In other words, are the patrons influenced by the selections of the others around them? Second, if this is the case, does it encourage conformity or nonconformity? In other words, would the patrons sitting around a table intentionally choose beers that were different from or the same as the choices of those ordering before them? Finally, we wanted to know whether being influenced by others’ choices would make people better or worse off, in terms of how much they enjoyed their beer.
THROUGHOUT THIS BOOK, I have described experiments that I hoped would be surprising and illuminating. If they were, it was largely because they refuted the common assumption that we are all fundamentally rational. Time and again I have provided examples that are contrary to Shakespeare’s depiction of us in “What a piece of work is a man.” In fact, these examples show that we are not noble in reason, not infinite in faculty, and rather weak in apprehension. (Frankly, I think Shakespeare knew that very well, and this speech of Hamlet’s is not without irony.)