What We Do Best is Delude Ourselves

I am not revealing any deep dark secret -- at least not to anyone who has read even one of my posts -- by saying that I'm a big fan of regulation (example post, here). Much though I would like to think that we can all police ourselves and behave ethically without the imposition of laws and penalties, I don't believe it (and if I did, you would -- rightly -- call me naive.).

We humans are much too good at covering up for ourselves, at rationalizing our ethically questionable behaviors.

I've been thinking about this for several days, ever since the story broke (on Wednesday 27 June) that giant British bank Barclays had agreed to pay $450 million to resolve accusations that it had manipulated Libor, the London interbank offered rate (used to set commercial and consumer loan rates), to its own benefit (selected New York Times DealBook articles here, here, and here; all by Mark Scott; the first by Scott and Ben Protess).

In the Barclays case, regulators say they uncovered “pervasive” wrongdoing that spanned a four-year period and touched top rungs of the firm, including members of senior management and traders stationed in London, New York and Tokyo. A 45-page complaint laid bare the scheme that unfolded from 2005 to 2009, describing how Barclays had made false reports with the aim of manipulating rates to increase the bank’s profits. Barclays was also accused of “aiding attempts by other banks to manipulate” Euribor [Euribor is the European interbank offered rate].

Barclay's American chief executive, Robert Diamond, originally offered apologies and announced that he and three other top officers would voluntarily give up their bonuses. A day later, Diamond was offering to give up his entire year's compensation. By Tuesday (2 July), Diamond had resigned.

Yesterday, he was reported to have told a Parliamentary committee that while the actions of 14 Barclays traders in manipulating the Libor made him "physically sick", it wasn't just Barclays that was to blame.

According to Scott's article, Diamond said that "the bank had raised concerns multiple times with American and British authorities about discrepancies over how Libor ... was set. The bank was not told to stop the practice."

In other words, there were other banks doing it too, and besides, the regulators could have stopped us.

Nor would Diamond accept sole responsibility for Barclays' actions (it is not clear how much Diamond knew, how early): "I don’t feel personal culpability. What I do feel is a strong sense of responsibility."

What prompted me to write this particular blog post was an episode of "On Point" that I heard this morning. Tom Ashbrook interviewed (here) Dan Ariely, a professor of psychology and behavioral economics at Duke, and author of a new book, The Honest Truth About Dishonesty: How We Lie to Everyone -- Especially Ourselves.

The whole interview was fascinating, and I'm looking forward to reading the book. Some interesting snippets that I recall:

* Golfers are in near-unanimous agreement that picking up the ball and moving it four inches to line up a better shot is a complete no-no. Nudging it with your foot, somehow, seems a little different, and significantly less "wrong". And tapping it gently with the club? More likely still, and almost OK. But we're still talking about the same four inches!

* The further away from the person we affect by our cheating, the more easily we are able to rationalize it: The individual who would never shoplift an actual CD from a music store has no problem downloading that music illegally.

* If "everybody else is doing it", we're much more likely to as well -- especially if there is an inherent conflict of interest. We have all ranted about evil bankers nearly bringing the whole system down, but can we be so sure that we would have behaved that much better, had we been incentivized in the same way and surrounded by other bankers behaving badly? ("Wow, these mortgage-backed securities don't look very good. But the more of them I sell, the bigger my bonus will be. And their quality doesn't seem to worry any of these smart guys I work with, so maybe they're really OK?")

Barclay's ex-CEO can blame the regulators (in part) and he may be right: they may not have been careful enough. Prof. Ariely's research indicates that, while clear rules may not stop all  the liars and cheats, they will deter many. University honor rules work -- even if not perfectly.

So the answer is better, stricter regulation.