December 2011 Archive

The Financial Times in its December 3, 2011 Week-End edition published a very insightful article entitled “What makes a rogue trader” by John Gapper. The writer analyses the behavior of a number of rogue traders in the recent and not so recent past. The losses were astronomical. Toshihide Iguchi from Daiwa Bank lost $1.1 billion, Kweku Adoboli from UBS, lost $2.3 billion and Jerome Kerviel of Society General lost $7.6 billion.  

Mr. Gapper writes: “Rogue trading it is now clear is not an aberration but integral to the banking system. Like the cycles of financial speculation and crashes that have occurred throughout history, rogue traders are always with us.”

One could point out that had those unauthorized trades made a profit for the banks that employed them, the rogue bankers would have been forgiven their breach of authority and most likely promoted if not named “banker of the year.”

It is interesting to note that none of the traders profited personally from their fraud.  Also of interest is that they all started to gamble to cover initial losses.

Psychologists Daniel Kahneman, of Princeton University, Nobel laureate and author of the current bestseller Thinking Fast and Slow and Amos Tversky of the University of Tel Aviv developed in 1979 the Prospect Theory. According to this theory, we all have an irrational tendency to be more willing to gamble with losses than with profits. Apparently, we do not heed to the proverb that says: “when in the hole, stop digging!”   

Yet we all have to take risks. That is part of life. There are very few decisions we make that do not involve risks because of life’s many uncertainties. Getting up in the morning is taking risks, we might fall, be run over by a bus or be the victim of unforeseeable negative event. 

However there are some risks we should not take. How can we determine the risks that are acceptable, and those that are not? Can ethics help? I think it can.

Let me list three questions I suggest we ask ourselves before making that determination.

Is the risk I am about to take:

1. Involve breaking the law or my company’s code of ethics?
2. Affect others negatively?
3. Involve the violation of some of my basic values such as truthfulness, honesty, fairness, respect and honor?

If we answered “yes” to anyone of those questions I would highly recommend we abstain.

As Nick Dandolos, a famous gambler who won and lost over $500 million in his lifetime, once wrote:

“The only difference between a winner and a loser is character.”

On November 22, 2011, nine students were arrested in Long Island, New York for allegedly paying from $500 to $3,600 for others to take their SAT test and four students were arrested for taking the test for them.  According to the ongoing investigation of this scandal, there is evidence that at least 40 students accepted payments or paid others to take the standardized tests.

Some have been very critical of Educational Testing Services (ETS) which administers the SAT for it lack of enforcement of its own rules. Jack Marshall of Ethics Alarms reveals in a recent blog post that: “if someone is caught cheating after the SAT services investigates, he or she is given a refund and allowed to take the test again- an no college is ever notified.”

Should we really be surprised by such cheating?  The example that the corporate world with its recent and not so recent scandals has given to our more junior members of society is less than pristine.

Karen Rubin in her December 1, 2011 article entitled “Road to SAT Cheating scandal leads to Wall Street” published by the Island Now believes that it is the consequence of a “culture that supports cheating as another calculated risk-reward business decision.” However, she writes: “it is wrong and goes to the heart of how the very fabric of the ideals this country was founded upon have been corrupted…”

We are particularly sensitive to academic dishonesty because we know that if unexposed it will lead to more cheating and lying in the future of the student’s private and professional life. If crime pays, why not engage in it?

Jeffrey Kenton of the International Society of Philosophers writes: “Cheating is not a philosophy, it is a strategy. People who cheat to succeed are also the same people who ran Enron, WorldCom and any number of other businesses with abysmal ethics records. The “luck” ran out and now most of they are scrambling to cover their hind sides before someone else exposes them. That is the life of the cheat.”

We all believe that cheating is wrong but why exactly? What moral values are violated in cheating?

Let me say that I do not like the word “cheating” because it somehow minimizes the severity of the action. From an ethical point of view the word “cheating” is an euphemism. For example, “cheating” on your taxes sounds less severe that committing fraud or “cheating” on your spouse does not sound as serious as committing adultery.

Cheating obviously violates the values of honesty, truthfulness and fairness and therefore compromises trust. Society cannot function without some degree of trust.

As Warren G. Bennis, the American scholar and organizational consultant once said:

“Trust is the lubrication that makes it possible for organization to work.”