Saturday, October 27, 2012

Why, and how much, do people cheat?

 Rajat Gupta continues to maintain that he has not contributed to insider trading and that he has not cheated. According to the jury, however, he disclosed the confidential information relating to Goldman Sachs Board to Raj Rajaratnam and therefore he did cheat.

Why did Rajat Gupta cheat? Nobel laureate, Gary Becker looks at cheating essentially as an economic issue. Becker considers humans as rational. A would-be cheat takes into account pay-off from cheating, probability of getting caught and severity of punishment.

Dan Ariely differs from Gary Becker and in his recent book titled "The (honest) Truth about Dishonesty", he refers to "Fudge Factor Theory". He argues, "Our behaviour is driven by two opposing motivations. On one hand, we want to view ourselves as honest (called 'ego motivation'). On the other hand, we want to benefit from cheating and get as much money as possible ('Financial motivation'). These two motivations are in conflict. Our amazing cognitive flexibility enables us to secure the benefits of cheating and at the same time view ourselves as honest, wonderful people!"

Ariely also quotes from Jerome K Jerome's novel 'Three men in a Boat' where the author takes a jibe at 'conscientious cheating'. "I knew a young man once, he was a most conscientious fellow and, when he took to fly-fishing, he determined never to exaggerate his hauls by more than 25% 'When I have caught 40 fish' said he, 'then I will tell people that I have caught 50. But I will not lie any more than that, because it is sinful to lie.' "

Cynics may say everyone cheats. Reward-risk equation may be different for different people. Trade-off between ego motivation and financial motivation is conditioned by one's values in life. Perhaps going scotfree on one occasion tempts a person to cheat again.

The Rajat Gupta phenomenon will puzzle and engage behavioural economists for months.

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