Bankers not too bothered about non-material rewards and penalties, shock, horror

News of another rogue trader losing his bank a few billion made me wonder, who was on the other end of these trades? And why haven’t they come forward? If I lose a fiver in the park, and someone finds it later that day, I’m down five pounds but that lucky person is (five) quids in. The financial debit and credit columns are clear enough, as is the ethics of the situation: the finder can’t reasonably be expected to do the right thing (in principle) because handing back the money is impossible (in practice).

The ethical situation is completely changed, of course, if the five pound note was not loose but in a wallet, with contact details. Then, most of us would agree that there is a duty on the finder to take reasonable steps to return the wallet to its rightful owner. That there is a duty is one thing, that a person responds to that duty quite another. Indeed, as Frank puts it (1988, p. 73), finding “a wallet full of cash in a deserted park is a golden opportunity” – for someone prepared to cheat, that is, for someone without a conscience.

We have evolution largely to thank (not religious codes of behaviour) that there are relatively few people who are completely lacking in conscience. The second murderer in Richard III is not someone you'd invite home, but even he admits to having been troubled by his conscience: “it made me once restore a purse of gold that, by chance, I found” (1.4.125–26). The irony is that, within his world, he feels shame for this act, while the rest of us would feel a warm glow of doing good.

A golden opportunity, Frank suggests, is one in which it pays to cheat, because there’s little chance of detection or harm to reputation. (Incidentally, this is why a reputation for not cheating doesn’t tell us much (ibid., pp. 74–75): “Not having a bad reputation is not the same thing as being known to be honest. The kinds of actions that are likely to be observed are just not very good tests of whether a person is honest.”)

Frank’s book exposes the inadequacies of the self-interest model of human behaviour (under which it is perfectly rational to steal the wallet) and argues for the commitment model, in which emotions play a strong role. An honest individual “is someone who values trustworthiness for its own sake” (ibid., p. 69) and who isn’t always on the lookout for an instant material payoff. Precisely because he has this attitude, “he can be trusted in situations where his behavior cannot be monitored” (as in the park, picking up lost wallets).

What is preventing cheating is the presence of a strongly felt emotion, without which we would be much worse off:

If the psychological reward mechanism is constrained to emphasize rewards in the present moment, the simplest counter to a specious reward from cheating is to have a current feeling that tugs in precisely the opposite direction. And because it too coincides with the moment of choice, the matching law does not discount it relative to the competing material reward. . . . it says that nonmaterial rewards and penalties may also matter. . . . there will be advantage in being able to suppress the impulse to cheat. We can thus imagine a population in which people with consciences fare better than those without. (p. 82)

We don’t need a psychologist to tell us that there is a “tendency for immediate rewards to appear misleadingly attractive” (p. 77), but I find Frank’s argument for the commitment model illuminating and persuasive. (If we all behaved like bankers, the model would be thoroughly disproved!) Being emotionally predisposed to regard cheating as unpleasurable is a good explanation for why people with a conscience are better able to resist the temptation to cheat, to take those immediate rewards.

I later read Simon Goodley’s report (accessed 18.09.11) on the UBS loss, in which an anonymous hedge fund trader admitted:

Of course there are bound to be people on the other side [of the UBS losses] who made miraculously large sums of money that weren’t authorised. They will be kept quiet. You won’t hear about it.

Marina Hyde’s comment piece (accessed 18.09.11) also points out that we only ever hear about the unauthorized losses, and that rogue trades are always losing trades. Bankers, it seems, are very good at keeping quiet about all those wallets they find in the park.

Since banking is all about taking golden opportunities, this should hardly come as a surprise. The competitive world of banking naturally weeds out individuals who are not so good at taking golden opportunities. As important to select out are the cheaters who get caught. Some do slip through, of course (we don’t live in a perfect world for banking, thank goodness), and – like Nick Leeson, Jérôme Kerviel and Kweku Adoboli – end up embarrassing their employers on the front pages every few years, almost as regular as Swiss clockwork.