25 Psychological Traps That Lead ‘Good’ People To Commit Fraud

25 Psychological Traps That Lead ‘Good’ People To Commit Fraud

Max Nisen and Aimee Groth | May 28, 2013, 1:27 PM | 18,389 | 3

Former Enron CEO Jeff Skilling (R) was convicted for conspiracy and securities fraud

Many white collar crimes aren’t committed by hardened criminals. It’s often normally moral people under financial strain, those under severe pressure from their bosses or shareholders, or people who get away with something minor then try to to test their limits.

So what exactly leads otherwise normal and hardworking people to cross the line? That’s the subject of a paper by Dr. Muel Kaptein of the Rotterdam School Of Management.

We’ve collected some of the key insights and cognitive biases as a guide of what to look out for in a workplace. Thanks to Dr. Kaptein for letting us feature his work. 

Tunnel vision

Setting and achieving goals is important, but single-minded focus on them can blind people to ethical concerns.

When Enron offered large bonuses to employees for bringing in sales, they became so focused on that goal that they forgot to make sure they were profitable or moral. We all know how that ended.

The power of names

When bribery becomes “greasing the wheels” or accounting fraud becomes “financial engineering,” unethical behavior can seem less bad.

The use of nicknames and euphemisms for questionable practices can free them of their moral connotations, making them seem more acceptable.

Social bond theory

In large organizations, employees can begin to feel more like numbers or cogs in a machine than individuals.

When people feel detached from the goals and leadership of their workplace, they are more likely to commit fraud, steal, or hurt the company via neglect.

The Galatea effect

Self image determines behavior. People who have a strong sense of themselves as individuals are less likely to do unethical things.

Alternatively, employees who see themselves as determined by their environment or having their choices made for them are more likely to bend the rules, as they feel less individually responsible.

Time pressure

In a study, a group of theology students were told to preach the story of the good Samaritan, then walk to another building where they’d be filmed. Along the way, they encountered a man in visible distress.

When given ample time, almost all helped. When they were deliberately let out late, only 63 percent helped. When encouraged to go as fast as possible, 90 percent ignored the man.

Acceptance of small theft

There are dozens of small temptations in any workplace. Stationary, sugar packets, and toilet paper frequently go home with employees.

Those small thefts are ignored. So are slightly larger ones, like over-claiming expenses or accepting unauthorized business gifts. It doesn’t take long for people to begin pushing those limits.

Self-serving bias

Few people believe they’re average; most think they’re smarter and more ethical than those around them.

That can lead to feelings of injustice. If somebody else gets a promotion, it’s not down to their performance and capacity, it must be something else. Those feelings, and overestimation of other’s biases can lead to unethical behavior.

Conspicuous consumption

Extreme wealth, or environments that reflect it can lead to unethical behavior. For employees, seeing excessive bonuses or perks that they don’t show leads to feeling of injustice and jealousy which may lead them to unethical behavior.

Research by Kathleen Vohs shows that the mere presence of money makes people more selfish, as they focus on success and individual needs over other factors.

The Pygmalion effect

The way that people are seen and treated influences the way they act. When employees are viewed suspiciously and constantly treated like potential thieves, they are more likely be thieves.

This effect occurs even in employees who aren’t initially inclined towards unethical behavior.

Reactance theory

Rules are designed to prevent unethical behavior, but when they’re seen as unjust or excessive they can provoke the opposite reaction.

This is known as reactance theory. People resent threats to their freedom, and they often manifest that resistance by flouting certain rules.

Obedience to authority

Obedience to authority is ingrained in our culture and workplace. When someone in a position of authority asks an employee to do something unethical or illegal, they can find it difficult to say no.

It’s easier to justify bad behavior, and when people see themselves as an instrument of another’s wishes, they feel less responsible. 

The blinding effect of power

Powerful people appear more corrupt because they’re caught more publicly. However, a recent study found that when given power, people set ethical rules much higher for others than they do themselves.

If someone is influential and sets rules for others, they can begin to see themselves as morally distinct from their employees, and not subject to the same rules.

Broken window theory

Former New York City Mayor Rudy Giuliani popularized the “broken window theory” when he led a sweeping effort to lower crime rates. The idea was to crack down on smaller, petty crimes, and clean up the city to create some semblance of order, and discourage larger crimes.

When people see disorder or disorganization, they assume there is no real authority. In that environment, their threshold to overstepping legal and moral boundaries is lower.

The free-rider problem

“If nobody else steals stationary, the company won’t notice if I do. If nobody else in the area pollutes, they won’t notice if a tiny bit of waste is released.”

Positive and ethical behavior can sometimes engender an opposite reaction. If total damage is limited, people feel as though they can take more liberties.  

The foot in the door

When a figure in authority asks someone to skirt the rules, they want to seem like a team player.

Giving in modifies self perception. A person may begin to think of themselves as extremely loyal, someone who gets things done. In that frame of mind, they may be willing to do increasingly unethical things.

Winner take-all competition

In situations where there is a clearly-defined winner and loser, people are more likely to cheat. They desperately want to avoid the financial and reputational costs of losing.

The people most likely to cheat may not even be those farthest behind, but rather those who are just short of their goal.

Cognitive dissonance and rationalization

When people’s actions differ from their morals, they begin to rationalize both to protect themselves from a painful contradiction and to build up protection against accusations.

The bigger the dissonance, the larger the rationalization, and the longer it lasts, the less immoral it seems.

Problematic punishments

Attaching fines or other economic punishments to immoral behavior can have an undesired effect. Once something is cast in those terms, it loses its moral connotation and becomes an entirely different calculation.

Rather than being about whether something is right or wrong, it becomes an economic calculation about the likelihood of getting caught versus the potential fine.

Lack of sleep and hypoglycemia

The rewards of unethical behavior are something people struggle with on a daily basis. As simplistic as it sounds, people who are hungry or tired have less self control.

Research has found that tired participants asked to complete math tasks significantly over-report correct answers. While being tired or hungry won’t make someone embezzle, it leaves them more open to moments of weakness.  

Escalating commitment

Big thieves usually start out as small thieves. One way such actions become a slippery slope leading to ever greater misconduct is the feeling that there’s no way out.

This has been seen in recent rogue traders like Jerome Kerviel and Kweku Adoboli. They got bonuses for taking big risks, but when those risks became big losses, they took even larger risks to try and make up for them.

Market and shareholder pressure

Former Citigroup CEO and Chairman Charles Prince once said, “As long as the music is playing, you’ve got to get up and dance.”

He was referring to the leveraged buyout market in 2007. Before the collapse, there was intense pressure for managers to join in on the huge and risky profits, despite the evident bubbliness of the market.

The compensation effect

Sometimes people, having been moral and forthright in their dealings for a long time, feel as if they have banked up some kind of “ethical credit,” which they may use to justify immoral behavior in the future.

An experiment from Nina Mazar and Chen-Bo Zhong found that people who have just bought sustainable products tend to lie and steal more afterwards than those who bought standard versions.

Negative consequences of transparency

Transparency usually serves to reduce unethical behavior, as it increases the likelihood of getting caught. Experiments examining the publication of conflicts of interest have found a perverse effect.

The effect comes from something called “moral licensing.” If a conflict of interest is publicly disclosed, it can seem less problematic, as if it has been agreed that it’s all right. That can lead people to indulge their bias.

Bad communication

Issues of corruption and morality are often treated as black and white, wrongdoers are badly punished, and gray areas are not discussed.

That can lead to an environment where rather than sounding out ideas that border on unethical, people push and test their limits.

The pressure to conform

Nobody likes being a nuisance. In order to fit in with a group, people do things they might not otherwise. That can lead them to ignore abuses for the sake of peace or unity and go along with questionable decisions.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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