When they put on a banker’s hat otherwise honest people become dishonest

Readers of my Ticket Clippers postings will not be surprised by this latest piece of academic research. A new study by Alain Cohn, Ernst Fehr, and Michel Maréchal from the Department of Economics at the University of Zurich shows that bank employees are in principle not more dishonest than their colleagues in other industries. The findings indicate, however, that the business culture in the banking sector implicitly favors dishonest behavior.

The scientists recruited approximately 200 bank employees, 128 from a large international bank and 80 from other banks. Each person was then randomly assigned to one of two experimental conditions. In the experimental group, the participants were reminded of their occupational role and the associated behavioral norms with appropriate questions. In contrast, the subjects in the control group were reminded of their non-occupational role in their leisure time and the associated norms. Subsequently, all participants completed a task that would allow them to increase their income by up to two hundred US dollars if they behaved dishonestly. The result was that bank employees in the experimental group, where their occupational role in the banking sector was made salient, behaved significantly more dishonestly.

A very similar study was then conducted with employees from various other industries. In this case as well, either the employees’ occupational roles or those associated with leisure time were activated. Unlike the bankers, however, the employees in these other industries were not more dishonest when reminded of their occupational role. “Our results suggest that the social norms in the banking sector tend to be more lenient towards dishonest behavior and thus contribute to the reputational loss in the industry,” says Michel Maréchal, Professor for Experimental Economic Research at the University of Zurich.

Social norms that are implicitly more lenient towards dishonesty are problematic, because the people’s trust in bank employees’ behavior is of great importance for the long-term stability of the financial services industry. Alain Cohn, who recently joined the Booth School of Business at the University of Chicago as a postdoctoral scholar, suggests concrete measures that could counteract the problem: “The banks could encourage honest behavior by changing the industry’s implicit social norms. Several experts and supervisory authorities suggest, for example, that bank employees should take a professional oath, similar to the Hippocratic Oath for physicians.” If an oath like this were supported with a corresponding training program in ethics and appropriate financial incentives, this could lead bank employees to focus more strongly on the long-term, social effects of their behavior instead of concentrating on their own, short-term gains.

The full article Business culture and dishonesty in the banking industry is published in the journal Nature behind a paywall but here is the abstract:

Trust in others’ honesty is a key component of the long-term performance of firms, industries, and even whole countries1. However, in recent years, numerous scandals involving fraud have undermined confidence in the financial industry. Contemporary commentators have attributed these scandals to the financial sector’s business culture but no scientific evidence supports this claim. Here we show that employees of a large, international bank behave, on average, honestly in a control condition. However, when their professional identity as bank employees is rendered salient, a significant proportion of them become dishonest. This effect is specific to bank employees because control experiments with employees from other industries and with students show that they do not become more dishonest when their professional identity or bank-related items are rendered salient. Our results thus suggest that the prevailing business culture in the banking industry weakens and undermines the honesty norm, implying that measures to re-establish an honest culture are very important.