with today well you’ve got up in the
morning took a shower or stir hair just
a hair dryer net breakfast eight cereals
fruit yogurt whatever had coffee tea you
took public transfer to come here or
maybe used to 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 u.s. academic study
that looks at US companies I have no
reason to believe that’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 three hundred and eighty
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
whistleblowers like Michael Woodford who
blew the whistle on Olympus these
whistleblowers 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 on this I’m
a researcher 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-interest that’s good
for everybody in the end self-interest
isn’t a merrily defined concept just for
your immediate utility it has a long
around implication let’s think about
that think about this dog here that
might be us all right there’s this
temptation I apologize to all
vegetarians but you know 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 ruining 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
right 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 cow
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 it’s 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 is 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 Emmanuel here he knows
he had a sausage is very tasty but he’s
gonna 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 this stuff about
incentives all this stuff about code of
conduct and bonus systems and so on
doesn’t make a whole lot of sense that
people are motivated by different values
perhaps so what are people actually
motivated
or goodbye right these two gentlemen
here have perfect hairdo 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’s 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 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 ten francs
if you say you have zero you get paid
zero friends 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
you know what’s coming on 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 six point twenty five percent
and I hope you can intuitively see that
the probability that all four of them
are tails is much lower than two of them
are tails right here’s what happened
people did this experiment for real
around thirty five to thirty to thirty
five 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 is
watching you the only consequence that’s
in place is you get more money if you
say four then less you leave twenty
francs on the table by announcing maybe
zero I don’t know whether the people the
other people over honest or whether they
also said a little bit higher or lower
than what they did because it’s
anonymous we only observe the
distribution but what I can tell you and
here’s another coin toss there you go
it’s tails all right
but don’t don’t check okay but I can
tell you is that not everybody behaved
like Adam Smith would have predicted
that 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 and protected value is a
value where you’re willing to pay a
price to uphold that value you are
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
the value the sausage less
quantitatively that’s quite powerful we
can measure these protected values for
example by a survey measure simple 9
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 that
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 in 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 principled
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 alright
to appeal to incentives I’m an economist
I certainly believe in the fact that
incentives work but do you 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]
you [Music]