The origins of misbehaviour

Why do people in positions of power behave badly? A new paper shows how experimental economics can shed light on this question:

Using a laboratory experiment, we fi…nd that senior workers often attempt to exploit junior workers...This occurs both when junior workers have complete information about how their effort affect the senior worker’s earnings, and when they have incomplete information about how their effort affects the earnings of the senior worker. These attempts, however, are more frequent and pronounced under incomplete information.

This means that the standard political response to misbehaviour by the powerful - to demand a resignation whilst maintaining basic structures of organizations - is often mistaken. As Marx said, and as subsequent research has shown, bad behaviour does not originate merely from the idiosyncratic impulses of nasty people, but rather from organizations which incentivize and facilitate bad behaviour.

But what are the organizational features that matter? These experiments suggest three inter-related things:

1. Social norms. In their experiment, there was a norm in favour of an equal division. This meant there was a default position of non-exploitative behaviour.

2. Information. Where juniors could see that they were being exploited - because they could observe seniors' pay-offs - they were empowered to resist exploitation. Not that such resistance was always necessary, because seniors - fearing it - adhered to the norm of equality in anticipation.

3. Power. The possibility of exploitation emerges because seniors have power over juniors.

It is, of course, trivial to apply this framework to Barclays' Libor fiddle. There was a social norm in favour of maximizing returns rather than for honest reporting.The process of reporting Libor was not as transparent as it could be; Libor is a hypothetical rate which in October 2008 had as much relevance to real behaviour as the price of unicorn meat. And power structures, rather than promoting honest behaviour, might even have militated against it.

The point here is that Barclays' problem was not that Bob Diamond is a bad person - the fact that he's a Chelsea fan proves that - but rather that structural pressures led to dishonesty.    

Comments

[NomadUK]

So it's just a coincidence that the people at the top are, almost uniformly, despicable sociopathic scumbags?

[Praxeologue]

Amusing to watch ministers try to extrapolate the behaviour of a few into a general conclusion about a poor moral culture... erm... those in glass houses?

A libertarian would call down a plague on both their houses.

[Min]

I'm not sure it is a trivial comparison, Chris. De-regulation, among other factors (globalisation; increased speed of transactions), has not only increased competition in the financial sector but also fostered - as you suggest - a culture which accepts dishonesty. On the trading floor, for example, the ability to tell lies convincingly appears to be an essential part of the job description.
But trust seems to me to be in very short supply in this country in general (I'm saying that not as an old creature, harking back to some entirely fictitious 'golden age', but as someone who has lived in other countries).
And, yes to NomadUK, there are always sociopaths at or near the top in corporate life! They're usually the ones keenest on deploying meaningless managementspeak ...

[Chris Purnell]

Junior staff have a also have the power to behave in such a way that there is a general assumption that they were told to do so. As every 'barrack room' lawyer knows the powerless have the ultimate power to sabotage by slavish obedience to nods and winks. Maximise profits!! "You got it gov! Leave it to me." And so on and so forth until the whole edifice comes tumbling down. Incidently these guys are usually known as 'Good Team Players.'

[scott]

John Terry is probably his hero.

[Kamo]

A major issue is the lack of checks and balances on executive power, the standard argument being that "shareholders" (read fund managers of financial institutions) are the checks and balances obviously doesn't stack up. The current systems do not tackle all the executive scams, tricks and wheezes that go on within companies that are kept concealed, and where the internal power structure insulate them from true accountability.

The last couple of years I have been involved in local politics, which is often pilloried, but I know now from comapring with my experiences of working for a very large blue chip that there are far more checks and balances on local policy making. Decisions on policy may still be taken in smokey rooms, but they eventualy come before a committee where there is a challenge from an independant opposition and the policy goes on an independent record (even if it is part 2 and therefore not public information). This means that if something is inconsistent, if it is half-baked, if it is venal, then there's only so much smokescreen and misdirection avaialble. And the official record means people cannot get convenient amnesia about where decisions orignate from.

Now, I don't see this as an argument for strong trade unions, not that I don't think trade unions have a role. It's just that another special intersts group in the mix to be bought and sold is not the same as a more internally transparent and balanced power structures which constrain decison makers from behaving in highly dubious ways and then pretending it never happened or it wasn't them.