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Economics and the Maximization of Profit (and Lies).

January 29th, 2013

by Dan Ariely

of Dan Ariely Blog

When a friend sent me this paper the other day, I admit that I took a long hard look at myself and my economist friends. According to this study, economists, it seems, are worse than most when it comes to truth telling. This discovery was made by researchers Raúl López-Pérez and Eli Spiegelman, who wanted to examine whether certain characteristics (for instance religiosity or gender) made people averse to lying. They measured the preference for honesty by canceling out other motivations, such as altruism or fear of getting caught.

The way they accomplished this was with a very simple experiment where a pair of participants acted as sender and receiver of information. The sender would sit alone in front of a screen that showed either a blue or green circle. He or she would then communicate the circle’s color to the receiver, who could not see the color or the sender. Senders received 15 Euros every time they indicated a green circle, and only 14 when they communicated that the circle was blue. Receivers earned an even 10 euros regardless of the color, and so were unaffected by either the truthfulness or dishonesty of the senders.

So senders had four strategies:

1) Tell the truth when shown a green circle and get the maximum payment;

2) Lie when shown a green circle, choosing a lower payment;

3) Tell the truth when shown a blue circle and receive the lower payment;

4) Lie when shown a blue circle and gain an extra euro.

All was well and good if senders saw a green circle, telling the truth earned them the maximum amount of cash (as you can imagine, option 2) was fairly unpopular). What if they saw blue though? Well, they had two options: tell the truth and lose a euro, or lie and get paid more. The experimenters reasoned that a lie-averse sender would always communicate the circle’s color accurately while senders motivated by maximizing profit would indicate green regardless.

Participants, who were from a wide array of socio-economic and religious backgrounds, also came from a range of majors. Researchers grouped majors together into business and economics, humanities, and other (science, engineering, psych). The results showed little difference in honesty as a factor of socio-demographic characteristics or gender. A student’s major, however, was a different story. As it turned out, those in the humanities, who were the most honest of all, told the perfect truth a little over half the time. The broad group of “other” was a bit less honest with around 40% straight shooters. And how about the business and economics group? They scraped the bottom with a 23% rate of honesty.

Keep in mind that this was one study of one group of people; however, it does indicate that the study of economics makes people less likely to tell the truth for its own sake. And this holds water, economically speaking: 1 euro has clear and measurable value, it can be exchanged for a number of things. The benefit of telling the truth in this situation does not carry any financial value (which is not to say lying in finance is not costly—clearly it is). But rationalization, which we all take part in, may be easier for those who think in terms of opportunity cost and percent profit.

This is not terribly surprising to me in the context of the greater history of economics, which has been characterized by the study of selfishness. The concept of the invisible hand (inherent in the notion of self-correcting markets) holds that people should act selfishly (maximizing their own profits) and that the market will combine all of their actions with an efficient outcome. While it’s true that markets can sometimes accommodate a range of behaviors without failing, if we continue to teach students the benefits and logicality of rational self-interest, what can we really expect?

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