Friday, November 21, 2014

Culture and Dishonesty in Banking: A Research Study Provides a Bit of Confirmation

Culture and Dishonesty in Banking:  A Research Study Provides a Bit of Confirmation

The following headlines caught my attention yesterday, especially after I’d devoted a good part of my Sunday New & Observer Column to the problem of culture in banking:

Bankers Cheat In Experiment But Only After Being Reminded They Are Bankers[1]
Bankers are more likely to cheat, at least according to one worrying experiment[2]
Banking breeds cheating for financial gain - Swiss researchers[3]
Banking industry culture fosters cheating[4]

A letter published in Nature entitled, “Business culture and dishonesty in the banking industry”[5] drove the press coverage.  As you’ll see, some of the headlines cited above misrepresented the study while others captured the researchers’ conclusions.  In the study, various groups, including a group of bank employees, were invited to play a simple game.  The subjects had to record the results of flipping a coin ten times after being told whether a heads or tails would result in the subject winning $20 per toss.  The subjects were not monitored.

In other words, the participants could make $200 in the unlikely event the coin came up with the winning face (heads or tails) ten times in a row, or if they cheated.  Otherwise, across a sample of 128 bankers, you’d expect them to report an average of five winning occurrences.  The participants were also asked a bunch of questions before playing the game.  One group was reminded via the questions that they were bankers.  The other group was not.  The researchers found that those bankers reminded of their profession reported much higher occurrences of tails than bankers who were not reminded of their profession.

The control group reported 51.6% winning tosses and the bankers who had been reminded of their profession reported 58.2%.  About 10% of the prompted bankers reporting winning all ten tosses.  The odds of ten winning coin tosses is 0.0098%.  In short, a significant proportion of the prompted bankers had to be cheating.  When other professions were reminded of their professions, the amount of cheating did not increase significantly.

The study is receiving so much publicity that the American Bankers Association felt compelled to release the following comment: “While this study looks at one bank, America's 6,000 banks set a very high bar when it comes to the honesty and integrity of their employees. Banks take the fiduciary responsibility they have for their customers very seriously.”    Clearly, this research has hit a nerve.

The ABA has a point.  It’s probably a huge stretch to condemn the honesty of an entire industry based on one study.  However, the ABA fails to mention that the researchers applied their experiment to people working at other banks (not just the 128 in the main part of the study) and got similar results.  I also think it’s a bit cheeky of the ABA to invoke the loft standard of  “fiduciary responsibility” when so many financial institutions deny that they had such a responsibility when they deal with claims filed by their customers.

I don’t see this study as proof that the banking industry has an honesty or culture problem.  Rather, I see it as a small bit of confirmation.  Whether it’s mortgages, credit cards, consumer loans, commercial transactions, setting LIBOR, or trading currencies, just about every major financial institution has committed serious transgressions.  If you need further evidence, download “Wall Street Bank Involvement with Physical Commodities” issued by the Senate Permanent Subcommittee on Investigations.”[6]  Over the course of 386 pages the committee’s staff report provides detailed studies of the corrosive impact of banks as they’ve come to control the markets for commodities like aluminum and gasoline.