What really motivates people to be honest in business | Alexander Wagner

234,583 views ・ 2017-09-26

TED


Please double-click on the English subtitles below to play the video.

00:12
How many companies have you interacted with today?
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Well, you got up in the morning,
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took a shower,
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washed your hair,
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used a hair dryer,
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ate breakfast --
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ate cereals, fruit, yogurt, whatever --
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had coffee --
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tea.
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You took public transport to come here,
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or maybe used your private car.
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You interacted with the company that you work for or that you own.
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You interacted with your clients,
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your customers,
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and so on and so forth.
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I'm pretty sure there are at least seven companies
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you've interacted with today.
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Let me tell you a stunning statistic.
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One out of seven large, public corporations
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commit fraud every year.
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This is a US academic study that looks at US companies --
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I have no reason to believe that it's different in Europe.
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This is a study that looks at both detected and undetected fraud
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using statistical methods.
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This is not petty fraud.
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These frauds cost the shareholders of these companies,
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and therefore society,
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on the order of 380 billion dollars per year.
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We can all think of some examples, right?
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The car industry's secrets aren't quite so secret anymore.
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Fraud has become a feature,
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not a bug,
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of the financial services industry.
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That's not me who's claiming that,
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that's the president of the American Finance Association
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who stated that in his presidential address.
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That's a huge problem if you think about, especially,
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an economy like Switzerland,
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which relies so much on the trust put into its financial industry.
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On the other hand,
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there are six out of seven companies who actually remain honest
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despite all temptations to start engaging in fraud.
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There are whistle-blowers like Michael Woodford,
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who blew the whistle on Olympus.
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These whistle-blowers risk their careers,
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their friendships,
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to bring out the truth about their companies.
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There are journalists like Anna Politkovskaya
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who risk even their lives to report human rights violations.
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She got killed --
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every year,
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around 100 journalists get killed
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because of their conviction to bring out the truth.
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So in my talk today,
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I want to share with you some insights I've obtained and learned
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in the last 10 years of conducting research in this.
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I'm a researcher, a scientist working with economists,
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financial economists,
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ethicists, neuroscientists,
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lawyers and others
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trying to understand what makes humans tick,
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and how can we address this issue of fraud in corporations
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and therefore contribute to the improvement of the world.
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I want to start by sharing with you two very distinct visions
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of how people behave.
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First, meet Adam Smith,
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founding father of modern economics.
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His basic idea was that if everybody behaves in their own self-interests,
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that's good for everybody in the end.
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Self-interest isn't a narrowly defined concept
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just for your immediate utility.
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It has a long-run implication.
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Let's think about that.
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Think about this dog here.
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That might be us.
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There's this temptation --
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I apologize to all vegetarians, but --
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(Laughter)
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Dogs do like the bratwurst.
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(Laughter)
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Now, the straight-up, self-interested move here
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is to go for that.
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So my friend Adam here might jump up,
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get the sausage and thereby ruin all this beautiful tableware.
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But that's not what Adam Smith meant.
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He didn't mean disregard all consequences --
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to the contrary.
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He would have thought,
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well, there may be negative consequences,
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for example,
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the owner might be angry with the dog
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and the dog, anticipating that, might not behave in this way.
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That might be us,
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weighing the benefits and costs of our actions.
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How does that play out?
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Well, many of you, I'm sure,
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have in your companies,
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especially if it's a large company,
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a code of conduct.
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And then if you behave according to that code of conduct,
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that improves your chances of getting a bonus payment.
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And on the other hand, if you disregard it,
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then there are higher chances of not getting your bonus
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or its being diminished.
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In other words,
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this is a very economic motivation
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of trying to get people to be more honest,
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or more aligned with the corporation's principles.
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Similarly, reputation is a very powerful economic force, right?
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We try to build a reputation,
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maybe for being honest,
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because then people trust us more in the future.
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Right?
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Adam Smith talked about the baker
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who's not producing good bread out of his benevolence
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for those people who consume the bread,
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but because he wants to sell more future bread.
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In my research, we find, for example,
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at the University of Zurich,
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that Swiss banks who get caught up in media,
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and in the context, for example,
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of tax evasion, of tax fraud,
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have bad media coverage.
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They lose net new money in the future
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and therefore make lower profits.
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That's a very powerful reputational force.
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Benefits and costs.
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Here's another viewpoint of the world.
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Meet Immanuel Kant,
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18th-century German philosopher superstar.
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He developed this notion
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that independent of the consequences,
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some actions are just right
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and some are just wrong.
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It's just wrong to lie, for example.
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So, meet my friend Immanuel here.
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He knows that the sausage is very tasty,
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but he's going to turn away because he's a good dog.
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He knows it's wrong to jump up
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and risk ruining all this beautiful tableware.
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If you believe that people are motivated like that,
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then all the stuff about incentives,
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all the stuff about code of conduct and bonus systems and so on,
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doesn't make a whole lot of sense.
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People are motivated by different values perhaps.
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So, what are people actually motivated by?
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These two gentlemen here have perfect hairdos,
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but they give us very different views of the world.
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What do we do with this?
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Well, I'm an economist
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and we conduct so-called experiments to address this issue.
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We strip away facts which are confusing in reality.
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Reality is so rich, there is so much going on,
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it's almost impossible to know what drives people's behavior really.
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So let's do a little experiment together.
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Imagine the following situation.
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You're in a room alone,
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not like here.
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There's a five-franc coin like the one I'm holding up right now
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in front of you.
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Here are your instructions:
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toss the coin four times,
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and then on a computer terminal in front of you,
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enter the number of times tails came up.
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This is the situation.
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Here's the rub.
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For every time that you announce that you had a tails throw,
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you get paid five francs.
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So if you say I had two tails throws,
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you get paid 10 francs.
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If you say you had zero, you get paid zero francs.
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If you say, "I had four tails throws,"
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then you get paid 20 francs.
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It's anonymous,
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nobody's watching what you're doing,
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and you get paid that money anonymously.
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I've got two questions for you.
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(Laughter)
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You know what's coming now, right?
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First, how would you behave in that situation?
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The second, look to your left and look to your right --
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(Laughter)
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and think about how the person sitting next to you
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might behave in that situation.
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We did this experiment for real.
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We did it at the Manifesta art exhibition
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that took place here in Zurich recently,
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not with students in the lab at the university
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but with the real population,
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like you guys.
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First, a quick reminder of stats.
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If I throw the coin four times and it's a fair coin,
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then the probability that it comes up four times tails
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is 6.25 percent.
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And I hope you can intuitively see
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that the probability that all four of them are tails is much lower
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than if two of them are tails, right?
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Here are the specific numbers.
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Here's what happened.
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People did this experiment for real.
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Around 30 to 35 percent of people said,
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"Well, I had four tails throws."
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That's extremely unlikely.
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(Laughter)
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But the really amazing thing here,
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perhaps to an economist,
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is there are around 65 percent of people who did not say I had four tails throws,
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even though in that situation,
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nobody's watching you,
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the only consequence that's in place
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is you get more money if you say four than less.
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You leave 20 francs on the table by announcing zero.
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I don't know whether the other people all were honest
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or whether they also said a little bit higher or lower than what they did
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because it's anonymous.
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We only observed the distribution.
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But what I can tell you -- and here's another coin toss.
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There you go, it's tails.
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(Laughter)
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Don't check, OK?
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(Laughter)
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What I can tell you
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is that not everybody behaved like Adam Smith would have predicted.
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So what does that leave us with?
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Well, it seems people are motivated by certain intrinsic values
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and in our research, we look at this.
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We look at the idea that people have so-called protected values.
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A protected value isn't just any value.
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A protected value is a value where you're willing to pay a price
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to uphold that value.
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You're willing to pay a price to withstand the temptation to give in.
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And the consequence is you feel better
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if you earn money in a way that's consistent with your values.
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Let me show you this again in the metaphor of our beloved dog here.
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If we succeed in getting the sausage without violating our values,
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then the sausage tastes better.
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That's what our research shows.
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If, on the other hand,
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we do so --
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if we get the sausage
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and in doing so we actually violate values,
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we value the sausage less.
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Quantitatively, that's quite powerful.
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We can measure these protected values,
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for example,
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by a survey measure.
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Simple, nine-item survey that's quite predictive in these experiments.
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If you think about the average of the population
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and then there's a distribution around it --
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people are different, we all are different.
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People who have a set of protected values
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that's one standard deviation above the average,
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they discount money they receive by lying by about 25 percent.
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That means a dollar received when lying
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is worth to them only 75 cents
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without any incentives you put in place for them to behave honestly.
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It's their intrinsic motivation.
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By the way, I'm not a moral authority.
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I'm not saying I have all these beautiful values, right?
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But I'm interested in how people behave
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and how we can leverage that richness in human nature
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to actually improve the workings of our organizations.
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So there are two very, very different visions here.
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On the one hand,
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you can appeal to benefits and costs
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and try to get people to behave according to them.
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On the other hand,
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you can select people who have the values
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and the desirable characteristics, of course --
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competencies that go in line with your organization.
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I do not yet know where these protected values really come from.
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Is it nurture or is it nature?
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What I can tell you
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is that the distribution looks pretty similar for men and women.
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It looks pretty similar for those who had studied economics
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or those who had studied psychology.
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It looks even pretty similar around different age categories
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among adults.
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But I don't know yet how this develops over a lifetime.
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That will be the subject of future research.
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The idea I want to leave you with
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is it's all right to appeal to incentives.
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I'm an economist;
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I certainly believe in the fact that incentives work.
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But do think about selecting the right people
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rather than having people and then putting incentives in place.
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Selecting the right people with the right values
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may go a long way to saving a lot of trouble
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and a lot of money
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in your organizations.
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In other words,
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it will pay off to put people first.
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Thank you.
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(Applause)
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