What is it about the financial sector that encourages bad behavior?

One reason why bankers might become more dishonest after being primed to think about their jobs is that being a good banker, like being a good used-car salesman, often requires dishonesty.

I’m thinking of a scene from the (non-fiction) book Liar’s Poker where an investment bank finds itself stuck holding a bunch of bonds whose value is rapidly declining. Does the firm swallow the loss? Of course not! Management tells the sales team that priority #1 is unloading the low-quality bonds onto the bank’s gullible customers at an inflated price.

Another example that might hit closer-to-home here is that of equities analysts on Wall Street during the .com bubble who became unreasonably bullish on certain tech companies in order to gin up IPO business for their firms’ profitable mergers/acquisitions divisions.

In banking, the interests of the firm and the customer are often misaligned, and, well, it’s not the customer who's going to pay the banker’s bonus.

Interesting article, but I'm not entirely sure I agree with the author's attempt to explain the findings of the original study.

The paper upon which this article is based is really cool, because it scientifically confirms something that many people (myself included) already believed: mere participation in our financial industry leads to a certain degree of moral corruption. However, the author of this article goes on to make the case that the cause of such endemic dishonesty is the focus on money and number crunching required in banking.

The author's evidence seems reasonable, but doesn't match up with the original study: banking employees that work in industry "support units" (e.g., HR or risk management) showed the same tend towards dishonesty as those working in "core" units (private bankers, asset managers, etc.) This issue is directly addressed in the original study. The author's thesis suggests that working more directly with numbers/money would cause a higher degree of dishonesty, but the paper points out: "the treatment effect in core units is similar and statistically indistinguishable from the support units."

There's something more complex at work in our banking system.

Banking culture is unique in that it seems completely willing to burn customers - I can't think of any other businesses that have this so embedded in their approach. Imagine a company like Zendesk, where, at the end of the year, they suddenly charged their clients an additional $5k on their credit card just because they had it on file.

And yet people and companies continue to do business with them. If a company like Goldman approached me about doing a deal on a credit swap, I'd assume I'm going to get the shaft - but large pension companies continue to work with them.

Of course, this is a generalization - there are honest people in the finance industry, but they tend to be in roles where the incentives, again, are aligned with their clients. I'm thinking RIAs and companies like Vanguard.

There is another cultural norm that is prevalent in the financial industry leads (IMHO) to dishonesty. It is an incredibly competitive industry, reliant on a small(ish) number of very well remunerated individuals.

These individuals are put under immense pressure to perform flawlessly. Any mistakes are picked up on very quickly and a perceived weakness can cause the wolves to circle in an instant. There is no incentive to come clean about mistakes, and immense pressure to cover-up and hide any weaknesses or errors.

You can't avoid human fallibility. If you expect perfection, all you get is lies and deceit. The only way to truly outperform is to institutionalise openness, continual improvement, and learning from our mistakes.

Higher social class predicts increased unethical behavior

http://www.pnas.org/cgi/doi/10.1073/pnas.1118373109

A system of incentives will see people act in line with those incentives. If you have heavy incentives to be dishonest, people's actions will be bent towards dishonesty.

There's an old saying: "The fish stinks from the head down."

A players hire A players.

Cheats hire cheats.

The actual title of the article is "Banking Culture Encourages Dishonesty". There is no question mark at the end.

I point this out because many times people assume that a headline that is in the form of a question means that the answer is "no", and the author is trying to make it sound like there is some question to get people to read. E.g., if you were reporting on an expedition that searched for and failed to find Bigfoot, no one is going to be interested if the headline is "Bigfoot not found", so you write it as "Bigfoot found?". If the expedition had found Bigfoot, you would have written "Bigfoot found!" which would pull in a lot more readers.

There are some pretty interesting things in this article, so it would be a shame if people skipped it because of that incorrectly added question mark.