Tax Season is here and cheating is in the air. We are all trying to find receipts, and figure out what we can reasonably claim as deductions. Did we end up talking about work last summer when we invited our co-workers for a BBQ?

Let me tell you about an experiment we did at MIT on cheating with some unsuspecting students. (more…)

Can it be that cheating and taking too much risk are related?

We learned that people cheat more when the object of cheating is even one step removed from money. Could it be that when financial tools are more complex it encourages people to take too much risk? It is hard to tell, but I suspect this might be the case.

A few years ago I got a new Audi A3. The car was great and I loved driving it, but about three months later, while I was driving down the Mass turnpike (trucks on my right and left), the transmission stopped responding and the car lost speed, fast. It was very dangerous to maneuver to the right shoulder, but eventually I made it.

Over the next month or so I had multiple “chats” with the Audi customer service representatives, as well as with the Audi repair shop where my car had become a permanent fixture (I think they were trying a new experiment on how to best annoy their customers and they were getting better and better at this with every passing day). About 5 weeks after the transmission died, I drove my rental car back to Boston, and took my Audi back to Princeton. But this was not the end of it for me. (more…)

Last week the second largest bank in France, Societe Generale, announced that it had uncovered a 4.9 billion euro ($7.14 billion) of fraudulent trades, allegedly committed by a 31-year-old trader named Jerome Kerviel.

Before we decide which parties are to blame, let me tell you about some experiments we recently conducted on cheating with MIT and Harvard students. (more…)

Harvard Business review just published a short description of some research that Nina Mazar, On Amir, and I carried out over the past few years as part of their “Breakthrough Ideas for 2008,” and who am I to challenge this categorization?

The academic paper describing these findings in more detail will come out in the Journal of Marketing Research sometime in the near future, but in the meantime, here is the short version of it.

In general, the results point to a few interesting aspects of human nature. One is that most of us, when tempted, are willing to be a little dishonest, regardless of the risks. Another is that even when we have no chance of getting caught, we still don’t become wild liars-our conscience imposes some limits. Finally (and what I find most disturbing), it’s clear that we have an incredible ability to rationalize our dishonesty and that justifying it becomes substantially easier when cheating is one step removed from cash. Nonmonetary exchanges allow people greater psychological latitude to cheat-leading to crimes that go well beyond pilfered pens to backdated stock options, falsified financial reports, and crony deals. Such latitude is the force behind the Enrons of the world.