What really motivates people to be honest in business | Alexander Wagner

Summary

The speaker explores the prevalence of corporate fraud, citing a study that suggests one in seven large public corporations commit fraud annually, costing society billions. They contrast Adam Smith's view of self-interest driving economic benefits with Immanuel Kant's moral absolutism, using experiments to show people's intrinsic values can motivate honesty. The talk emphasizes the importance of aligning corporate values with employees' protected values to foster integrity and trust, ultimately benefiting organizations.

Takeaways

• 😀 The speaker suggests that on a typical day, one might interact with at least seven different companies, each with varying levels of trustworthiness.
• 🔍 A US academic study reveals that one out of seven large public corporations commit fraud annually, affecting both shareholders and society to the tune of approximately $380 billion per year.
• 🚗 The car industry and financial services are cited as examples where fraud has become a notable issue, with the latter's reputation being particularly impacted by such scandals.
• 🌍 Despite the prevalence of fraud, the majority of companies—six out of seven—remain honest, highlighting the importance of integrity in business operations.
• 🎓 The speaker introduces the concept of 'protected values,' values that individuals are willing to uphold at a personal cost, which can influence their behavior in the face of temptation.
• 🐶 Using a humorous dog metaphor, the speaker illustrates the idea that people may act in their own self-interest but also consider the long-term consequences of their actions.
• 📊 The speaker discusses economic motivations such as codes of conduct and bonuses that aim to align employee behavior with corporate principles.
• 🤔 Two contrasting philosophical viewpoints are presented: Adam Smith's idea that self-interest ultimately benefits society, and Immanuel Kant's belief in intrinsic moral values that guide behavior regardless of consequences.
• 🧪 An experiment is described where participants toss a coin and report the results for payment, revealing that a significant portion of people do not maximize their earnings by reporting dishonestly, suggesting the presence of intrinsic values.
• 💰 The concept of 'protected values' is further explored, showing that individuals with such values may devalue monetary gains obtained through dishonest means.
• 🌟 The speaker concludes by advocating for the importance of selecting individuals with the right values as a preventative measure against fraud and a strategy for building trust within organizations.

Q & A

How many companies does the speaker claim one interacts with on a daily basis?

The speaker claims that on average, one interacts with at least seven companies in a day.

What is the statistic mentioned regarding the rate of fraud among large public corporations?

The speaker cites a US academic study stating that one out of seven large, public corporations commit fraud every year.

What is the estimated annual cost of fraud to shareholders and society according to the study mentioned in the script?

The study suggests that fraud costs shareholders and society approximately 380 billion dollars per year.

What industry is mentioned as having its secrets exposed due to fraud?

The car industry is mentioned as an example where its secrets have become not so secret due to fraud.

How does the speaker describe the current state of the financial services industry in relation to fraud?

The speaker states that fraud has become a feature, not a bug, of the financial services industry, as claimed by the president of the American Finance Association.

What is the speaker's profession and how does it relate to the topic of the talk?

The speaker is a researcher and scientist who collaborates with various experts to understand human behavior and address the issue of corporate fraud.

What are the two contrasting views on human behavior presented by the speaker?

The speaker presents the views of Adam Smith, who believes that self-interest ultimately benefits everyone, and Immanuel Kant, who argues that some actions are inherently right or wrong, regardless of consequences.

What is the concept of 'protected values' as discussed in the script?

Protected values are values that individuals are willing to pay a price to uphold, even in the face of temptation, and adhering to these values can make people feel better about their actions.

How does the speaker describe the experiment involving a five-franc coin and its purpose?

The experiment involves tossing a coin four times and reporting the number of tails, with payment based on the reported results. It aims to test whether people are motivated by self-interest or by intrinsic values.

What was the surprising result of the coin toss experiment?

Surprisingly, around 30 to 35 percent of people reported getting four tails, which is highly unlikely, suggesting that many participants were not being completely honest.

What advice does the speaker give regarding the selection of people in organizations to prevent fraud?

The speaker advises that it pays off to select people with the right values and intrinsic motivations, as they are less likely to engage in fraudulent behavior even when not monitored.

Outlines

00:00

🤝 The Ubiquity of Corporate Interactions and Fraud

The speaker begins by asking the audience to consider the numerous companies they interact with daily, from using a hair dryer to taking public transport or driving a car. They assert that on average, one interacts with at least seven companies each day. The speaker then introduces a startling statistic: one out of seven large public corporations commit fraud annually, costing shareholders and society around 380 billion dollars per year. This is based on a US academic study that includes both detected and undetected fraud. The speaker also highlights the importance of trust in industries like finance, particularly in economies like Switzerland, and acknowledges the honesty of the majority of companies despite the temptation to engage in fraudulent activities.

05:01

🐾 The Ethical Dilemma: Self-Interest vs. Moral Integrity

The speaker contrasts two philosophical viewpoints on human behavior. The first is Adam Smith's economic perspective, which posits that individuals acting in their own self-interest ultimately benefits society, taking into account long-term consequences. The second is Immanuel Kant's moral philosophy, which argues that some actions are inherently right or wrong, regardless of outcomes. The speaker then describes an experiment where participants, unsupervised, toss a coin and report the number of tails to earn money, revealing that a significant portion of people did not maximize their earnings, suggesting that not all are motivated solely by financial incentives. This introduces the concept of 'protected values,' which are values for which individuals are willing to forgo personal gain to uphold.

10:01

💼 The Power of Intrinsic Motivation and Protected Values in Organizations

The speaker delves into the concept of 'protected values,' which are values that individuals are willing to sacrifice for, even at a personal cost. They argue that when individuals earn money in a way that aligns with their values, they feel better about it, and conversely, when they compromise their values for financial gain, they derive less satisfaction from it. The speaker discusses research indicating that people with higher levels of protected values discount the value of money earned dishonestly by about 25%. They suggest that organizations should consider selecting individuals based on their values and intrinsic motivations, as this could be more effective than relying solely on incentives to ensure ethical behavior.

Keywords

💡Fraud

Fraud refers to the intentional deception made for personal gain or to damage another individual. In the context of the video, it is used to describe unethical activities within corporations that result in significant financial losses to shareholders and society. The script mentions that one out of seven large public corporations commit fraud annually, costing approximately 380 billion dollars per year.

💡Shareholders

Shareholders are individuals or entities that legally own one or more shares of stock in a public or private corporation. The video script highlights the impact of corporate fraud on shareholders, as they bear the financial consequences of such actions, which in turn affects society as a whole.

💡Trust

Trust is the reliance on the integrity, strength, ability, or surety of a person or entity. Within the video, trust is a central theme, particularly in reference to the financial industry in Switzerland. The speaker emphasizes the importance of trust in maintaining a healthy economy and the role of honest companies in upholding this trust.

💡Whistle-blower

A whistle-blower is a person who exposes secretive information or activity within a private or public organization that is deemed illegal, unethical, or not correct. The script cites Michael Woodford as an example of a whistle-blower who risked his career to reveal the truth about his company, Olympus.

💡Protected Values

Protected values are core beliefs or principles that individuals hold dear and are willing to defend at a personal cost. The video discusses the concept of protected values in the context of personal integrity and ethical behavior in corporations. People with strong protected values may forgo financial gains if it means compromising their values.

💡Incentives

Incentives are rewards or benefits offered to motivate certain behaviors. The speaker in the video discusses the use of incentives in encouraging honesty and adherence to corporate codes of conduct. However, the video also suggests that selecting individuals with the right values may be more effective than relying solely on incentives.

💡Economists

Economists are professionals who study the production, distribution, and consumption of goods and services. The script mentions the speaker's collaboration with economists, among other professionals, to understand the motivations behind human behavior in the context of corporate fraud.

💡Experiments

In the video, experiments refer to scientific studies or tests conducted to observe and analyze human behavior under controlled conditions. The speaker uses an experiment involving a coin toss to demonstrate how people respond to the opportunity to cheat for monetary gain, revealing insights into intrinsic motivation and values.

💡Reputation

Reputation is the beliefs or opinions that are generally held about someone or something. The video discusses the power of reputation as an economic force, where maintaining a positive image can lead to increased trust and future business, as illustrated by the example of Swiss banks and their media coverage.

💡Self-interest

Self-interest is the concern for one's own welfare or gain, often considered a fundamental motivation in economic theory. The video references Adam Smith's concept of self-interest, where individuals weigh the benefits and costs of their actions, including the potential consequences of their behavior.

💡Integrity

Integrity refers to the quality of being honest and having strong moral principles. The script contrasts the idea of acting out of self-interest with the concept of integrity, where individuals choose to act rightly regardless of the consequences, as exemplified by the actions of whistle-blowers and journalists.

Highlights

People interact with at least seven companies daily through various activities like showering, eating breakfast, using a hair dryer, commuting, and working.

One out of seven large public corporations commit fraud annually, costing shareholders and society around $380 billion per year, according to a US academic study.

Fraud has become a systemic issue in industries like the car and financial services sectors.

Switzerland's economy heavily relies on trust in its financial industry, making the issue of fraud particularly concerning.

Whistleblowers and journalists play a crucial role in exposing corporate fraud and human rights violations, often risking their careers and lives.

The speaker has spent a decade researching the motivations behind human behavior in the context of corporate fraud, collaborating with experts from various fields.

Adam Smith's economic theory posits that self-interest, when considering long-term consequences, can lead to societal benefits.

Codes of conduct and bonus systems in companies are economic motivations designed to align employee behavior with corporate principles.

Reputation is a powerful economic force; banks with bad media coverage due to fraud lose money in the future.

Immanuel Kant's moral philosophy emphasizes that some actions are inherently right or wrong, regardless of consequences.

People may be motivated by intrinsic values rather than just incentives, as demonstrated by the coin toss experiment where participants reported fewer tails than expected for higher payouts.

The concept of 'protected values' refers to values that individuals are willing to pay a price to uphold, even when faced with temptations.

Earning money in a way that aligns with one's values can make the reward feel more satisfying, while violating values can diminish the perceived value of the reward.

Survey measures can quantify protected values, showing that individuals with higher protected values discount the value of money earned through lying by about 25%.

The distribution of protected values appears similar across gender, educational background, and age groups, but the origins of these values remain unclear.

Incentives can be effective, but selecting individuals with the right values may be more beneficial in the long run for organizations, potentially saving trouble and money.

The speaker concludes that putting people first, by selecting those with aligned values, can be a strategic advantage for organizations.

Transcripts

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 --

(Laughter)

Dogs do like the bratwurst.

(Laughter)

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.

(Laughter)

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 --

(Laughter)

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.

(Laughter)

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.

(Laughter)

Don't check, OK?

(Laughter)

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.

(Applause)