Dan Ariely: The Truth About Cheating

The James B. Duke Professor of Behavioral Economics at Duke University, Dan Ariely is also the best-selling author of ‘Predictably Irrational: The Hidden Forces that Shape Our Decisions’. His next book ‘Perfectly Irrational’ will be published next month.

Using simple experiments, Ariely, 42, studies how people behave, as opposed to how they should or would perform if they were completely rational. His interests span a range of behaviours such as buying (or not), saving (or not), ordering food in restaurants, pain management, procrastination, dishonesty, and decision making under different emotional states. He is regular on twitter .

My interest in the irrationality of human behavior started many years ago in hospital after I had been badly burned. If you spend three years in a hospital with 70 percent of your body covered in burns, you are bound to notice several irrationalities. The one that bothered me in particular was the way my nurses would remove the bandage that wrapped my body. Now, there are two ways to remove a bandage. You can rip it off quickly, causing intense but short-term pain. Or you can remove it slowly, causing less intense pain but for a longer time.

My nurses believed in the quick method. It was incredibly painful, and I dreaded the moment of ripping with remarkable intensity. I begged them to find a better way to do this, but they told me that this was the best approach and that they knew the best way for removing bandages. It was their intuition against mine, and they chose theirs. Moreover, they thought it unnecessary to test what appeared (to them) to be intuitively right.

After leaving the hospital, I started doing experiments that simulated these two ripping methods. And I found that the nurses were wrong: Quick ripping turned out to be more painful than slow ripping. In my experiments, I discovered a collection of tricks that could have been used to lessen the pain or manage it more effectively. For instance, they could have started from the most painful part of the treatment and moved to less painful areas to give me a sense of improvement; they could have given me breaks in between to recover. There are great lessons to be learned from such experiments, lessons that apply to economics, markets, policymaking, and even our personal lives.

As it turns out, it is not that useful, and sometime even costly, to base our decisions on our intuitions. Instead, we need to inject some science in the way we go about everyday life because if one merely keeps following his instincts, he will continue making the same (preventable) mistakes.

Over the years, I have examined many topics related to the mistakes we all make when we make decisions, and one topic that I have explored in some depth is that of cheating behaviour, and I would like to describe this in a bit more depth.

We have recently seen a number of big corporate frauds and stock market scandals. The question arises: is it just the case of a few bad apples or is it a deeper systemic problem? The answer, we’ve found, lies in conflicts of interest. What happens when you put good people in situations that create conflict? They usually succumb to temptation. You see it in everybody, be it politicians or businessmen. So, how do we understand these influences in order to prevent them?

In our experiments, we find that a lot of people cheat by just a little bit. In standard economics, cheating is supposedly a straight cost-benefit analysis. People look at the odds of getting caught and the associated punishment, and then cheat when it makes sense to do so. However, in our experiments we find that people do not act strictly according to this model; they cheat only to the extent that they can continue to feel good about themselves and rationalise their actions. You can call it a Personal Fudge Factor, a limit up to which human beings comfortably cheat without feeling bad about it.

There are ways this Fudge Factor can expand or compress. It compresses (and people cheat less) when you remind them about their commitment to honesty or ask them to recite the Ten Commandments. The Fudge Factor expands under other conditions. If people see others cheating, they grow more comfortable doing the same. If people are not cheating in cash, but in intangible things like stock options, then they tend to cheat more. Still, even in these cases where we see more cheating, we see a lot of people cheating to a limited degree.

Now, consider situations where conflicts of interest facilitate or even promote dishonest behaviors. Take the case of a doctor or a banker and assume that Approach A would benefit his client and Approach B would benefit himself. Does the doctor/banker see things in a way that is better for his client, or do his choices reflect his own best interests? Because most of us look at things to favour ourselves, he will probably (unwittingly, even), be able to shade reality just by a bit, see it from a more comfortable perspective, and as a consequence cheat by a little bit and go for the option more suitable with his selfish interests.

If you look at the entire economy of cheating, blue-collar crime is insignificant — it is morally upsetting, but negligible financially. On the other hand, the cost of cheating by “good people” is enormous because they cheat continuously, just a little at a time, but because this is done by a lot of people and a lot of times, it accumulates rather quickly. We performed experiments of this type on about 15,000 people. Of this, only 10 people cheated a lot and the cost of their cheating was about $100 (akin to our blue collar bandits). But about 10,000 people cheated a little bit, costing us more than $20,000! As you can see, the difference is impressive, and I suspect that it reflects on the ratio of the cost of blue and white-collar crime to society.

There are two main points here. First, conflicts of interest are real, deep-seated and very hard to overcome. Moreover, it is not that clear to people when they have conflicts of interest, and as a consequence it is unlikely that politicians or bankers will see the influence of these forces on their decisions. These challenges might be even more pronounced in a developing country like India where the rules are not always that clear and conflicts of interest proliferate.

Second, there is a significant financial toll attributed to these conflicts of interest. But, because they are not visible or outlandish (like a robbery), they lack the same sense of depravity or emotional response, and we often fail to try and control them. This is where we need to correct our approach. We need to remember the accumulation of a lot of people cheating a little bit and start thinking of ways to eliminate the conflicts of interest that push people to cheat.

But is it possible to completely eliminate these conflicts of interest? Most likely not. Still, we can do our best to try. What should we do? What we need to do is understand where the conflicts of interest are coming from and avoid those sticky situations from the start. Simply changing penalties and punishments, or picking a new more complex way to pay executives is unlikely to work and what we need to understand is that if we were faced with the same conflicts of interests we too would behave the same way — and this is why we can’t put people in situations of conflicts of interests and expect them to ignore their incentives — we must try to eliminate conflicts of interests as much as we can.