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Chitra Subramaniam | The News Minute | November 28, 2014 | 07:03 pm IST

It is a devilishly honest attempt to find out why bankers lie. It is the first scientific analysis conducted in a fortnight in a bank that shows how honest people can turn dishonest in a context and an environment. It comes at a time when the banking industry is facing a credibility crisis with stories of rogue traders, LIBOR and gold markets, money laundering and compromised investment advice.

Entitled “Business Culture and dishonesty in the banking industry” by Alain Cohn, Ernst Fehr and André Maréchal, three researchers from the University of Zurich in Switzerland the study which provides an explanation for unethical business practices in the banking industry is making waves around the world.

Bankers are honest in a controlled condition. “However, when their professional identity as bank employees is rendered salient, a significant proportion of them become dishonest,” Maréchal told Chitra Subramaniam, Editor in Chief of The News Minute (TNM) in a first interview that the team has given to Indian media. Excerpts:

Your study shows that while bank employees are not more dishonest than other people, the banking environment can prompt bankers to lie. What were some of the reasons to embark on this project?

The banking industry has come in for a lot of criticism in recent years and there is genuine concern internationally about how it operates.
The business culture, i.e. the unwritten and informal norms that prevail in parts of the banking industry, were often held responsible for this. It has been claimed that these behavioral norms implicitly tolerate or favor dishonest behavior. But, there was no scientific evidence to base this effect on. We were in contact with many banks about our study and one of them agreed to work with us on the condition that their identity must remain anonymous.

What was your methodology and sample size?

We recruited approximately 200 bank employees for the study, 128 from large international banks and 80 from other banks. Each person was randomly assigned to one of two groups. The experimental group was prompted to think of their work environment with questions about which bank they work for, how many years of banking experience they have etc. The control group had questions about what they do when they are not in their working environment, leisure activities etc.

Both groups had to toss a coin ten times and report online whether it showed “heads” or “tails” and they could make $200. The subjects knew in advance if heads or tails would lead to monetary payoff for a specific coin toss. To simulate the competitive environment in banks, we told them they would only earn the money if they were higher than or equal to a randomly drawn subject from a pilot study. The incentive to cheat was high as the subjects were unobserved as they tossed the coins. . We were able to determine if the subjects told the truth on average or not by using probability calculus.

What did the results show?

They showed that the bank employees behaved honestly in the control group, suggesting that in contrast to the public image bank employees are not more dishonest than other people. But some of them became less honest when they were reminded of their occupational roles – in this case banking – as compared to their colleagues in the control group where the employees were not reminded of their work environment. The main experiment was completed with 128 employees of a large international bank and an additional 80 participants from other banks. The results did not differ statistically between the employees of main bank and the other banks. We thus conclude that this is not a phenomenon of one individual bank.

The study created quite a stir with people drawing conclusions like all bankers are dishonest etc. Can you comment on this interpretation?

The study does not support this statement. On the contrary, the results from the control group show that bank employees behave honestly on average even when faced with strong incentives to behave dishonestly.

Neither do we claim that the business culture of all banks is problematic. However, the results strengthen the hypothesis that the scandals of the last few years (LIBOR, foreign currency exchange manipulations etc.) were partially caused by a problematic business culture.

What is the way ahead?

We see a basket of actions that need to be taken beginning with self-regulation. Banks have to examine the concrete work routines to see where and when employees make ethically critical decisions. Some actions may be legally right, but ethically wrong – that conversation has to happen.  As a second step, there has to be a common understanding about which behavior is socially desirable and which is not. And as a corollary of the second step, group pressure or peer pressure can also become a critical factor to enforce socially desirable behavior.

Moreover, experts are suggesting that bank employees should swear a professional oath similar to the Hippocratic Oath for doctors. That would obviously be an encouraging development but the empirical effectives of such an oath would need to be tested.

What is your view on these large bonuses that people chase – isn’t that an incentive to trip?

We think financial incentives and bonuses also need closer examination in order to make sure that are in line with a business culture that promotes honesty, societal expectations and customer satisfaction.

This has two implications: First, financial incentives that reward employees for behavior that is in conflict with the clients’ and wider society’s interest should be reduced. And second, performance incentive schemes can also be used to signal the firm’s cultural values. They should be redesigned such that the clients’ satisfaction and general citizenship behavior are also part of performance targets.

What is the next project you are working on?

It is an experiment studying the biological foundations of honest behavior. We are working with a team of neuroscientist to test whether non-invasive brain stimulation can promote honest behavior.

The study appeared first in The Nature magazine.

Chai With Chitra

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