Why Does Fraud Happen?

May 5, 2012



Bernie Madoff; looks like anybody’s grandfather.



Bernie Madoff; looks like anybody’s grandfather.

 Is Bernie Madoff inherently evil? Certainly his victims think so. But a more interesting question is what went through his mind when he decided to defraud his clients? Or did actually decide to commit fraud on a gargantuan scale? Recently we have been treated to a raft of scientists who were caught using fake data and publishing fraudulent papers. How is it that that these people strayed from the scientific  dictum of above all seek truth?

A recent post on the NPR website tells a story that sheds a new light on the issue of unethical behavior. You can also listen to the story as broadcast on All things considered http://www.npr.org/player/v2/mediaPlayer.html?=1&t=1&islist=false&id=151764534&m=151793586.

The question of the root causes of unethical behavior occupied psychologists and sociologists for decades. And now something like a consesus is shaping up. What these researchers have concluded is that most of us are capable of behaving in profoundly unethical ways. And not only are we capable of it — without realizing it, we do it all the time.

It’s all in the framing

Chana Joffe-Walt and Alix Spiegel, who produced the story, describe research conducted by Ann Tenbrunsel, a researcher at Notre Dame who studies unethical behavior. Essentially, Tenbrunsel argues, certain cognitive frames make us blind to the fact that we are confronting an ethical problem at all.

Tenbrunsel recently ran an interesting experiment. She got together two groups of people and told one to think about a business decision. The other group was instructed to think about an ethical decision. Those asked to consider a business decision generated one mental checklist; those asked to think of an ethical decision generated a different mental checklist. She next had her subjects do an unrelated task to distract them. Then she presented them with an opportunity to cheat.

Those cognitively primed to think about business behaved radically different from those who were not — no matter who they were, or what their moral upbringing had been. “If you’re thinking about a business decision, you are significantly more likely to lie than if you were thinking from an ethical frame,” Tenbrunsel says.

According to Tenbrunsel, the business frame cognitively activates one set of goals — to be competent, to be successful; the ethics frame triggers other goals. And once you’re in, say, a business frame, you become really focused on meeting those goals, and other goals can completely fade from view.

The first step

Still, regardless whether a problem is framed in ethical or business terms, there is this first step in which the momentous decision is made. Or is it? When scientists who had faked data where interviewed in depth to chronicle the development of fraudulent behavior invariably their story began with a minor “correction” of some outlying data point that made the paper less than perfect. It got through the review process undetected; it seemed so easy. It was the first step down the proverbial slippery slope. The ethical justification, “the overall message of the paper is important, and valid; it would be a shame it were rejected for a minor data point”, made it easier. After that, all falsifications were justified by ”even it it’s not true, it should be”, and ” everybody is doing it”, and the slide became unstoppable.

This is true not only of straying academics, even Bernie Madoff started out with a minor transgression; a clients account was “borrowed from”, to be repaid ASAP, when the first funds come in. Of course, the funds did not arrive in time for repayment  and slowly a Ponzi scheme was aborn.

Is this specific to financial fraud?

The Milgram experiment on obedience to authority figureswas a series of notable social psychology experiments conducted by Yale University psychologist Stanley Milgram, which measured the willingness of study participants to obey an authority figure who instructed them to perform acts that conflicted with their personal conscience.

The milgram experiment (Source: Wikipedia)

The experimenter ( E) ordered the teacher (T), the subject of the experiment, to give what the latter believes are painful electric shocks to a learner (L), who is actually an actor and confederate. The subject believes that for each wrong answer, the learner was receiving actual electric shocks, though in reality there were no such punishments. Being separated from the subject, the confederate set up a tape recorder integrated with the electro-shock generator, which played pre-recorded sounds for each shock level.

Before conducting the experiment, Milgram polled fourteen Yale University senior-year psychology majors to predict the behavior of 100 hypothetical teachers. All of the poll respondents believed that only a very small fraction of teachers (the range was from zero to 3 out of 100, with an average of 1.2) would be prepared to inflict the maximum voltage. Milgram also informally polled his colleagues and found that they, too, believed very few subjects would progress beyond a very strong shock.

In Milgram’s first set of experiments, 65 percent (26 of 40) of experiment participants administered the experiment’s final massive 450-volt shock, though many were very uncomfortable doing so; at some point, every participant paused and questioned the experiment; some said they would refund the money they were paid for participating in the experiment.

The experiment was designed to see if obedience to authority, the cause of the mass participation of ordinary Germans in executing the Holocaust, could have happened in the U.S. But what intrigued me most was the question of “the first step”, how did the volunteers/”teachers”overcome their initial moral . The answer was buried in one of Milgram later writings about his famous experiment. The key was to frame the experiment in terms of authoritative science and make the volunteers feel as participants in a worthy scientific endeavour. And to make their decision to apply electric shock to the “learners” easier, the first shock was to be only 15 volts, barely noticable, and the increments in the intensity of the shocks were of 15 volts as well. In subsequent interviews volunteers confirmed that the low voltage of the shock made it easier for them to rationalize that it is a minor inconvenience compared with the elevated purpose of scientific research.

Lessons learned

These and many other experiments demonstrate the importance of the first ethical compromise in the downward slide of perfectly honest people like you and me who crossed an almost imperceptible boundary of ethicality (yes language mavens, this is a word) on an inexorable slide into dishonesty, massive fraud, atrocities and genocide.

I find it chilling how civilized people can so easily cross to the dark side. The veneer of civiliztion is indeed thin and fragile. Unless we  jealously guard it through culture, education and laws, we are bound to lose what makes us humans unique.