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honesty in business (TED talk by Alexander Wager)

honesty in business (TED talk by Alexander Wager)

“I hope I shall possess firmness and virtue enough to maintain what I consider the most enviable of all titles, the character of an honest man.”      George Washington

I enjoy TED talks.  Last evening, I watched a TED talk by Dr. Alexander Wagner titled “What really motivates people to be honest in business.”  You can access that talk via the TED website: CLICK HERE.

Dr. Wagner begins his presentation by reciting something we are all very familiar with–namely, that there is an abundance of dishonesty (even fraud) in the business world.  According to his data, one out of every seven large public companies in the United States commit fraud each year.  Note, that shockingly high proportion (i.e., 1/7th) and also that his research shows a recurrence of these things.  In other words, repeated fraud year after year.  Also, consider the fact that these are statistics Dr. Wagner has somehow gleaned from available information. But we all know that when companies and people are committing dishonest acts, they most often do all possible to hide such things. Therefore, it is reasonable to assume that the real numbers are higher than what Wagner reports.  Now that we are all feeling good about things, Wagner also notes that he is not talking about “petty fraud.”  Rather, he is talking about significant acts which cost the shareholders of companies an estimated $380 billion each year. I guess one silver lining here is that the data suggests that 6 out of 7 major U.S. companies remain relatively honest in their dealings.  That is somewhat encouraging, right?

Dr. Wagner continues his presentation by examining two opposing views as to why people do what they do. He starts with the views of Adam Smith, who was a pioneer in the world of modern economics. Smith believed that individuals act in accordance with their self-interests whenever possible. To clarify, Smith wasn’t just talking about immediate self-interest, but he gave us humans a lot of credit and believed that our ability to reason and apply logic, to foresee the consequences of our actions, played heavily into how we formulated and applied our self-interest.  In other words, the reasonable person would not steal from a bakery to feed their belly (most of the time), because that person would know that stealing would lead to prison and such was not in that person’s self-interest.  So perhaps a better way to label Smith’s view of human nature is that we tend to act in accordance with our reasoned and enlightened self-interest.  He used the example of a baker who produced quality bread because he knew it would sell, people would be happy with the bread, would tell their friends and all would return to purchase more bread.

Wagner then contrasts the Smith view with that of Immanuel Kant.  Kant was a German philosopher who lived during the eighteen century and who believed that there are certain fundamental values common to all–i.e., some things are just inherently right, and some things are always wrong.  Kant believed that most humans are aware of these concepts of right and wrong and when operating within their right senses, humans will most often choose to do what is right and shun that which is wrong.

Dr. Wagner tells about an experiment that he conducted to test the honesty of a group of individuals in Switzerland (where Wagner lives).  People were given the option of reporting outcomes from coin flips, without any supervision and with anonymous reporting of the results.  The test participants would be paid by what data they reported, (regardless of how that report related to actual coin flip results).  Again, remember that the experiment was performed in private, without the individuals being required to give their identity and they were then paid anonymously.  What were the results?  About one-third of the people were dishonest in their reporting–which dishonestly enabled them to make more “free money.”  On the other hand, the other two-thirds of those taking part in the experiment did the right thing, even though nobody was watching and they would have made money by acting dishonestly.

So does this mean that the Kant view of the world is more correct?  After all, it would have seemed to have been in the “self-interest” of all experiment participants to have reported their results in a way that enabled them to get the biggest payout.  Remember, nobody was watching; they faced no consequences for their dishonesty.  Does this mean that Adam Smith’s view of the world is wrong, that we don’t behave in our self-interest?  No, if Adam Smith was just a mistaken quack, we would not be still reading and citing his works centuries after the fact…:)  We intuitively understand that Adam Smith had it right. We recognize in ourselves and others the tendency to do what we believe will serve our best interests, both in the short and long terms.  This is generally true, even though we sometimes witness people who seem unable to recognize and factor in the long-term outcomes of their actions and vice versa. But either way, humans are self-interested beasts, no doubt.

It would seem that as opposite and polarizing as their views may appear, Adam Smith and Immanuel Kant each had it right in their observations and predictions of human nature.  We tend to have certain core values of what is right and wrong, and we also respond to incentives and self-interest motives much of the time.  Sometimes you and I are disciplined enough to do what is “right” even if that appears in opposition to our short term self-interest.  On the other hand, you have heard the phrase that everyone has their price (i.e., integrity is fine until there are enough zeros associated with the cost of honesty).

Dr. Wagner appears to lean more on the side of believing in and relying on the values of people–the right people.  Some people are simply more honest than others and less prone to be moved by the temptation to sell their integrity “for a mess of pottage” (or a large check).  Here is how Dr. Wagner summarizes his presentation and current 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.

For what it’s worth, I agree with the thesis of Dr. Wagner’s talk and certainly believe that finding, hiring and retaining the “right” people, individuals with integrity and other core values, will do much to address the rampant dishonesty and fraud that exists in the business world (and the world generally).  But from my experience in the legal and business world, I would also suggest that requiring a MUCH higher level of transparency and accountability in the business world would also do much to improve the environment of honesty.  Dr. Wagner refers to this earlier in his presentation by citing the example of Swiss banks which are found to have engaged in fraudulent practices, and after these things are made public, those banks have significant associated costs because clients and customers then choose to work with other banks. Likewise, when companies publish a “code of conduct” and make adherence to such code a part of the compensation structure of employees, it is very often the case that employees then see that it is in their self-interest to act honestly and ethically.  Even if such employees would not otherwise choose the right if left to their own devices, they will do so if they see that they will profit thereby.

Because we are all prone to make selfish and often unwise choices when left “in the dark”, with nobody watching and especially when we believe that our actions will not be discovered (this is almost universally true), in the context of business dealings, we would do well to require higher levels of transparency in operations, management, decision-making and action-taking in general.  In contrast to the actions “in the dark”, when you and I are required to act in the “light of day”, whether or not we are naturally and customarily inclined to be honest, if we know that one or more people are watching and that we will later be accountable for our actions, we are much more likely to be honest.


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