Psychology of Fraud: Chapter 1

Psychology Of Fraud: Why Good People Do Bad Things

• Unethical behavior in the news has caused psychologists and economists to rethink the causes of such behavior.
• Researchers find the traditional model of bad behavior being tied to bad character to be inadequate.

Chapter 1: The Promise

• Toby Groves grew up on a farm in Ohio with a strong moral character.
• In 1986, he visited his family and had an experience that made him value being good even more
• Toby's father showed him a newspaper with Toby's brother on the front page for bank fraud.
• Toby's brother was almost 20 years older and worked at a local bank and was seen as selfish and manipulative.
• Toby's father asked him to promise to never get into trouble like his brother, and Toby swore he wouldn't.
• 22 years later, Toby stood before the same judge as his brother, being sentenced for the same crime - fraud.
• The fraud involved millions of dollars, drove companies out of business, and resulted in about 100 job losses.
• In 2008, Toby went to prison for two years and struggled to understand how it happened and wondered if he was a bad person or if it was genetic.
• Psychologists and economists have been studying what causes unethical behavior and how people's brains process information when making decisions.

Bounded Ethicality

• Researchers have found that people's ability to behave ethically is seriously limited.
• People may want to be ethical and moral, but cognitive biases and limitations can prevent it.
• Researchers argue that most people are capable of behaving unethically without realizing it.

Chapter 2: The First Lie

• Toby Groves has been trying to understand his behavior since getting out of prison two years ago.
• Toby founded his own mortgage loan company early in his career and had his promise to his father in mind.
• He aimed to be transparent in everything he did, according to him and his employees.
• In 2004, company had problems when Toby made key business changes and was distracted focusing on a side project
• His company was almost a quarter of a million dollars in the hole.
• Toby decided to take out a mortgage on his own farmhouse to fix the shortfall
• However, his application would likely be rejected if he told the truth about his income.
• Toby lied and said he was making $350,000 when he was making much less.
• This was the first lie Toby told and it opened the door to all other unethical acts.

Why We Don't See The Ethical Big Picture

• Ann Tenbrunsel from Notre Dame studies unethical behavior.
• She says people don't always understand the choice they are making when facing an ethical decision.
• They are frequently blind to the ethics of a situation.
• Psychologists have documented ways our minds fail to see what is directly in front of us.
• The way a decision is framed can change how one views the decision and the eventual choice.
• Cognitive frames can make people blind to the fact that they are confronting an ethical problem.
• Tenbrunsel found that thinking about a business decision made people more likely to lie than if they were thinking from an ethical frame
• The business frame activates goals to be competent and successful, while the ethics frame triggers goals to be fair and not hurt others.
• Focusing on business goals can make other goals fade from view.
• Toby's initial choice to lie on his loan application was likely due to focusing on making the best business decision, which made him blind to the ethics.
• People can be genuinely unaware that they are making a profoundly unethical decision

Chapter 4: Fraud Spreads

• Tenbrunsel says that blindness to the ethical dimensions of a situation might explain Toby's first unethical act.
• After his initial lie, Toby discovered more losses at his company and needed to save his business.
• The easiest way to cover the losses was to get more loans, so he took out false loans on houses that didn't exist.
• This required manufacturing borrowers, homes, and paperwork.
• Toby needed help from his staff, who knew how loan documents should look and how to fake them.
• He told his employees he had screwed up and asked for their help.
• Everyone agreed to help him solve the problem
• Toby also got assistance from other companies
• He needed a title company to sign off on the fake documents, and they agreed to help.
• One title company president ended up in jail and another agreed to a legal resolution.

Chapter 5: We Lie Because We Care

• Financial incentives do not fully explain unethical behavior
• People commit fraud because they like each other and want to help, especially those they identify with.
• When helping people, people do not see what they are doing as unethical.
• Lamar Pierce points to emissions testers who sometimes lie and pass cars that should fail
• Between 20% and 50% of cars that should fail are illicitly passed.
• Financial incentives do not fully capture the reason for that cheating
• You are more likely to fail in an expensive polluting car, and more like to pass in a Honda Civic, regardless of pollution
• Gino says feeling empathy towards others makes you want to help them out.
• Emissions testers who make a modest salary feel empathetic towards people in cheaper cars
• Testers commit fraud because they are nice
• emissions testers cognitively cannot appreciate the consequenses of their fraud when making that choice.
• They weigh the costs to the global environment against the benefits of helping someone who is right there who needs help.
• Toby's staff faced the same kind of decision: future abstract consequences versus helping the real person in front of them.
• They helped out Toby without focusing on the ethics, and together they perpetrated a $7 million fraud.

Chapter 6: Denouement

• Toby confessed everything to FBI agents in 2006 and was relieved.
• Two years later, he stood before the same judge who had sentenced his brother.
• He was grateful his father wasn't alive to see him in jail and wondered how he ended up there.
• He felt haunted breaking his promise to his father
• Flawed humans at work results in the need for improved organization in the workplace
• Auditors need to rotate every few years so they do not befriend there client and look past errors
• Laying on contacts should be explicitly unethical and illegal, so people do not consider doing it.
• Remind people of the simple differentiation of what is right and what is wrong.