Alain Cohn

Business culture and dishonesty in the banking industry

Trust in others’ honesty is a key component of the long-term performance of firms, industries, and even whole countries. However, in recent years, numerous scandals involving fraud have undermined confidence in the financial industry. Contemporary commentators have attributed these scandals to the financial sector’s business culture, but no scientific evidence supports this claim. Here we show that employees of a large, international bank behave, on average, honestly in a control condition. However, when their professional identity as bank employees is rendered salient, a significant proportion of them become dishonest. This effect is specific to bank employees because control experiments with employees from other industries and with students show that they do not become more dishonest when their professional identity or bank-related items are rendered salient. Our results thus suggest that the prevailing business culture in the banking industry weakens and undermines the honesty norm, implying that measures to re-establish an honest culture are very important.

Evidence for Countercyclical Risk Aversion: An Experiment with Financial Professionals

A key ingredient of many popular asset pricing models is that investors exhibit countercyclical risk aversion, which helps explain major economic puzzles such as the strong and systematic variation in risk premiums over time and the high volatility of asset prices. There is, however, surprisingly little evidence for this assumption because it is difficult to control for the host of factors that change simultaneously during financial booms and busts. We circumvent these control problems by priming financial professionals with either a boom or a bust scenario and by subsequently measuring their risk aversion in two experimental investment tasks with real monetary stakes. Subjects who were primed with a financial bust were substantially more risk averse than those who were primed with a boom. Subjects were also more fearful in the bust than in the boom condition, and their fear is negatively related to investments in the risky asset, suggesting that fear may play an important role in countercyclical risk aversion. The mechanism described in this paper is relevant for theory and has important implications, as it provides the basis for a self-reinforcing process that amplifies market dynamics.

Bad Boys: How Criminal Identity Salience Affects Rule Violation

We conducted an experiment with 182 inmates from a maximum-security prison to analyze the impact of criminal identity on dishonest behavior. We randomly primed half of the prisoners to increase the mental saliency of their criminal identity, while treating the others as the control group. The results demonstrate that prisoners become more dishonest when we render their criminal identity more salient in their minds. An additional placebo experiment with regular citizens shows that the effect is specific to individuals with a criminal identity. Moreover, our experimental measure of dishonesty correlates with inmates’ offenses against in-prison regulation. Altogether, these findings suggest that criminal identity plays a crucial role in rule violating behavior. JEL classification: K00, C93, K14, K42, Z10

Increasing honesty in humans with noninvasive brain stimulation

Significance Honesty affects almost every aspect of social and economic life. We conducted experiments in which participants could earn considerable amounts of money by cheating on a die-rolling task. Cheating was substantial but decreased by more than one-half during transcranial direct current stimulation over the right dorsolateral prefrontal cortex. This stimulation-induced increase in honesty was functionally specific: It did not affect other types of behavioral control related to self-interest, risk-taking, and impulsivity. Moreover, cheating was only reduced when it benefited the participants themselves rather than another person. Thus, the human brain implements specialized processes that enable us to remain honest when faced with opportunities to cheat for personal material gain. Importantly, these processes can be strengthened by external interventions. Honesty plays a key role in social and economic interactions and is crucial for societal functioning. However, breaches of honesty are pervasive and cause significant societal and economic problems that can affect entire nations. Despite its importance, remarkably little is known about the neurobiological mechanisms supporting honest behavior. We demonstrate that honesty can be increased in humans with transcranial direct current stimulation (tDCS) over the right dorsolateral prefrontal cortex. Participants (n = 145) completed a die-rolling task where they could misreport their outcomes to increase their earnings, thereby pitting honest behavior against personal financial gain. Cheating was substantial in a control condition but decreased dramatically when neural excitability was enhanced with tDCS. This increase in honesty could not be explained by changes in material self-interest or moral beliefs and was dissociated from participants’ impulsivity, willingness to take risks, and mood. A follow-up experiment (n = 156) showed that tDCS only reduced cheating when dishonest behavior benefited the participants themselves rather than another person, suggesting that the stimulated neural process specifically resolves conflicts between honesty and material self-interest. Our results demonstrate that honesty can be strengthened by noninvasive interventions and concur with theories proposing that the human brain has evolved mechanisms dedicated to control complex social behaviors.

Fair Wages and Effort Provision: Combining Evidence from the Lab and the Field

The presence of workers who reciprocate higher wages with greater effort can have important consequences for labor markets. Knowledge about the determinants of reciprocal effort choices is, however, incomplete. We investigate the role of fairness perceptions and social preferences in workers’ performance in a field experiment in which workers were hired for a one-time job. We show that workers who perceive being underpaid at the base wage increase their performance if the hourly wage increases, while those who feel adequately paid or overpaid at the base wage do not change their performance. Moreover, we find that only workers who display positive reciprocity in a lab experiment show reciprocal performance responses in the field, while workers who lack positive reciprocity in the lab do not respond to the wage increase even if they feel underpaid at the base wage. Our findings suggest that fairness perceptions and social preferences are key in workers’ performance response to a wage increase. They are the first direct evidence of the fair-wage effort hypothesis in the field and also help interpret previous contradictory findings in the literature.

Job History, Work Attitude, and Employability

We study whether employment history can provide information about a worker’s noncognitive skills—in particular about “work attitude,” or the ability to work well and cooperatively with others. Our hypothesis is that, holding all else equal, a worker’s frequent job changes can indicate poorer work attitude, and that this information can be transmitted in labor markets through employment histories. We provide support for this hypothesis across three studies that employ complementary field, lab and survey experiments. First, using a laboratory labor market in which the only valuable characteristic of workers is their reliability in cooperating with an employer’s effort requests, we demonstrate that prior employment information allows employers to screen for such reliability and allows high-reliability workers to obtain better employment outcomes. Second, we conduct a field experiment in which we vary the frequency of job changes in fictitious job applicants’ resumes. Those applicants with fewer job changes are more likely to receive callbacks from prospective employers. A third survey experiment with human resource professionals confirms that the resume manipulations in the field study create different perceptions of work attitude. Our work highlights the potential importance of job history as a signal of worker characteristics, and points to a cost for workers of frequent job changes.We study whether employment history provides information about a worker’s “work attitude,�? i.e., the tendency to act cooperatively and reliably in the workplace. We conjecture that, holding all else equal, frequent job changes can indicate poor work attitude and that this information is transmitted through employment histories. We find support for this hypothesis across three studies that employ complementary lab, field, and survey experiments, as well as in labor market panel data. First, a tightly controlled laboratory labor market experiment demonstrates that prior employment information allows employers to screen for reliable and cooperative workers and that these workers obtain better employment outcomes. Second, we conduct a field experiment that varies the frequency of job changes in applicants’ resumes and find that those with fewer job changes receive substantially more callbacks from prospective employers. Third, a survey experiment with Human Resources professionals confirms that the resume manipulations in the field study create different perceptions of work attitude and that these largely account for the callback differences. Finally, we find evidence consistent with our hypothesized relationships in empirical labor market data. Our work highlights the potential importance of job history as a signal of work attitude in labor markets, and points to a potential cost of frequent job changes.