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What really motivates people to be honest in business?

Q&A with Alexander F. Wagner, Ph.D.

Why do some companies succeed and others fail? Why do some engage in deception and even massive fraud and others stay honest? Do we need regulations to deal with these questions or are shareholders’ market discipline and pressure enough? These are just some of the questions Alexander F. Wagner, Ph.D., is interested in as he tries to discern, via his research, how employees in organizations make their decisions. He’s an associate professor of finance at the Swiss Finance Institute in the University of Zurich, Switzerland.

Wagner says he balances two passions: the thrill of seeking knowledge about fundamentals of human behavior for knowledge’s sake, and the desire to apply insights in the real world to improve the workings of markets and organizations.

Fraud Magazine recently interviewed Wagner as a preview before he speaks at the 2019 ACFE Fraud Conference Europe March 27-29 in Zurich.

FM: Why did you decide to study economics?
In school, I had particularly enjoyed the ancient languages. I began to study economics and law since this seemed like a good general education in an area where I had up to then not really learned much. Little did I know that it would then become such a passion.

FM: What were some of the influences that steered you on to your academic path?
When my macroeconomics professor at the University of Linz suggested to me, after the first year of studies, that I might consider becoming his research assistant, I had no clue what that would mean. I still remember when he gave me an example of an academic paper, and I almost literally did not get past the first page in terms of understanding. But something about it fascinated me, so I studied harder and more. My professors in Linz were so kind to then suggest and recommend me for Ph.D. programs in the U.S., and that is where my passion for academia really took off. I was and am blessed to have the support of caring and competent advisors, mentors, friends and, most importantly, my family.

FM: As an economist, you’ve chosen a myriad of research areas. What attracts you to the topic of honesty and dishonesty and employee behavior in business?
It’s such an important topic, with so much at stake, and it is one that requires a look from several perspectives. Economics alone is not enough nor is psychology. I have always enjoyed different vantage points on a topic.

FM: In your talk at TedxZurich, you say that people are motivated by certain intrinsic “protected values.” Can you describe what those are and their implications for behavior — both honest and dishonest?
Protected values are those for which people are willing to pay a price to defend them. In my research, I am particularly interested in protected values for honesty, but there are also others, such as protected values for love, for life, the environment, for honor, and so on. The key implication is that people driven by such values will not solely respond to the consequences of their behavior but will be driven by what they feel is right or wrong as such — in the extreme even independently of the consequences.

FM: In your talk, you say that organizations can appeal to benefits and costs to try to get people to behave according to them. Or they can select people who have the values and desirable characteristics or competencies that are in line with organizations. Should organizations favor one or the other, or a combination of both? Does it depend on the types of organizations and industry?
Sometimes you have the luxury of selecting the right people, and one should definitely strive to have that freedom. But sometimes you have to work with the people that you have. Even then, however, it is important to know how different people respond to incentives. It seems that too often managers think that everybody will respond the same to incentives, and that is just not the case. I don’t know of research results that would speak to how the choice between selecting people and incentivizing them depends on the industry, but that is something that might be worth researching further.

FM: You say that you’ve discovered that what matters to most people is not only how much money they receive but also whether they behaved honestly to receive that money. Then how do you explain the motivations of the thousands of fraudsters our members investigate each year? If they’re not concerned with honesty, what do you think they might be concerned with?
I am an economist. Thus, I, of course, expect people, even those with protected values, to still be motivated by money or other incentives that give them utility. If the temptation for engaging in fraudulent activity is too great, that will drive behavior. What our research suggests is, however, that some people will less easily give in to temptations than others.

FM: How have you worked with companies’ governance systems to help shape employees’ behaviors and thereby reduce fraud? Can you give some anonymous cases?
I am indeed very open towards collaborations with companies to develop ways of analyzing interventions. My work, especially as an independent counsel with PricewaterhouseCoopers, has been on thinking about how to incorporate qualitative criteria in the incentive systems of top management. The challenge here is that investors often have perfectly understandable questions about the concreteness and specificity of qualitative criteria in compensation systems. In a planned field experiment with a large company, I am embarking on using social norms to influence behavior towards honesty. But it is too early to report on this.

FM: In an academic paper, you and your colleagues conducted an experiment assessing the extent to which people trade off the economic costs of truthfulness against the intrinsic costs of lying. Can you describe the experiment and results, and how they could apply to ACFE members?
The experiment is very simple, but that’s its advantage. You are a CEO. You know that the true earnings per share are 31 cents. The market expects 35 cents. You can, using a legally accepted accounting choice, announce 35 cents. You get paid a higher bonus if you do so. What do you do? We paid participants for real in this experiment, and we have since repeated it with different stakes and other populations. Although this is a one-shot decision, with no observability, no auditing, no social pressure, no risk of detection, a sizable fraction of participants chose to not announce the high earnings. They thus left money on the table to announce the true earnings, even though purely economic, consequentialist thinking would have dictated to take the higher bonus by announcing, legally, the higher earnings. The takeaway is that people do differentiate between what’s legal and what’s right. At least some people are motivated by the process by which they earn money, not just by the money itself. That is important context to know when analyzing fraud, and when trying to prevent it.

FM: Can you give a preview of what you’ll be presenting at the 2019 ACFE Fraud Conference Europe?
I will review the newest evidence on human deception and honesty choices. I will also discuss what happens when people find out that they have been lied to. Moreover, a survey will be conducted among ACFE members in advance of the conference that will try to inform a picture of what the challenges are that ACFE members perceive as particularly important. I will also discuss some promises and perils of new technologies, such as distributed ledger technology. But I won’t say more now or nobody will come to the session!

FM: What advice from your research can you give our members — fraud examiners — as they work with dishonest fraudsters and honest employees every day?
My main piece of advice is: Don’t rely too quickly on so-called best practices. There really often is no best practice. People are different. Organizations are different. Situations are different. Only through understanding the specifics of a case and a person’s motivations can we hope to develop strong support for integrity.

Dick Carozza, CFE, is the editor-in-chief of Fraud Magazine. Contact him at dcarozza@ACFE.com.

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