Fermat's Library | Dishonesty in Everyday Life and Its Policy Implications annotated/explained version.

### TL;DR The standard economics perspective considers only one ...

Dan Ariely - (Dis)Honesty [![](https://i.imgur.com/KbEgb4R.jpg)]...

Dan Ariely is a professor of Psychology and Behavioral Economics at...

From the Accenture Survey: > ***"one-fourth (24 percent) said th...

A theory that only takes into account external benefits states that...

#### Ultimatum Game: There are two players involved in an ultima...

When people lie they care about more than simply maximizing their o...

> *** "socialization is a key to the development of internalized re...

According to Freud the superego incorporates the values and morals ...

The internal reward mechanism that curbs dishonest behavior can be ...

**Self-deception** represents a biased, self-serving information fl...

**There are four general drivers of dishonesty: ** 1. lower extern...

Proposed solution to curbing dishonest behavior for different scena...

Vol. 25 (1) Spring 2006, 1–000

ISSN: 0743-9156 (print), 1547-7207 (electronic)

Dishonesty in Everyday Life and Its Policy

Implications

Nina Mazar and Dan Ariely

ishonest acts are all too prevalent in day-to-day life. This article examines some possible

psychological causes for dishonesty that go beyond the standard economic considerations of

probability and value of external payoffs. The authors propose a general model of dishonest behavior

hat includes internal psychological reward mechanisms for honesty and dishonesty, and they discuss

the implications of this model in terms of curbing dishonesty.

Nina Mazar is a postdoctoral associate (e-mail: ninam@mit.edu), and

Dan Ariely is Luis Alvarez Renta Professor of Management Science

(e-mail: ariely@mit.edu), Sloan School of Management, Massachu-

setts Institute of Technology.

ompanies such as Enron, Tyco, WorldCom, and Adel-

phia are associated with some of the biggest financial

scandals in U.S. corporate history since the Great

epression. These corporations exemplify how the boom

years of the 1990s have been accompanied by a serious ero-

sion in business principles and, especially, ethics in the

accounting and auditing profession. The Brookings Institu-

tion estimated that the Enron and WorldCom scandals alone

would cost the U.S. economy approximately $37–$42 bil-

lion of gross domestic product in the first year alone (Gra-

ham, Litan, and Sukhtankar 2002). For comparison, this is

approximately the amount that the U.S. federal government

spends each year on homeland security (De Rugy 2005).

In addition to corporate scandals, almost all companies

present their employees with the conflict between selfishly

pursuing their own financial goals and being honest. Bro-

kerage companies represent perhaps the most clear exam-

ples of such companies. Brokers are rewarded on the basis

of the volume or profitability of the business they transact;

such a system provides ample opportunities for conflicts of

interest. Although brokers are supposed to act in their

clients’ best interests, the commissions system can tempt

them to choose personal gains over their clients’ interests;

for example, brokers may experience pressure to buy and

sell when they stand to gain larger commissions, they may

recommend stocks or funds that are suitable for their inter-

ests but not for the client’s interest, they may delay the

trades ordered by their clients to invest their own money

first, or they may misuse knowledge of a large impending

order (Davis 2004; McDonald 2002).

Companies and their employees are not alone in the play-

ground of dishonesty (Murphy and Laczniak 1981). In addi-

tion to corporate scandals and individuals within companies

who behave dishonestly, consumers also behave in ways

that are ethically questionable (Bagozzi 1995; Vitell 2003).

For example, in a recent survey conducted by Accenture

(2003) on insurance fraud, approximately 25% of U.S.

adults approved of overstating the value of claims to insur-

ance companies, and more than 10% indicated that submit-

ting insurance claims for items that were not lost or dam-

aged or for treatments that were not provided is acceptable.

According to Accenture’s press release, the Insurance Ser-

vices Office estimates that the cost of fraud in the U.S. prop-

erty and casualty industry is approximately 10% of total

claims payments, or $24 billion annually. Similar incidents

of consumer fraud can be found in the retail industry.

According to the National Retail Federation (Speights and

Hilinski 2005), “wardrobing,” or the return of used clothing,

was estimated to cost approximately $16 billion in the

United States in 2002.

Another domain that is central to consumers’ unethical

behavior involves intellectual property theft, such as music,

film, and software piracy. Although the standards and

morals linked to such behaviors are not yet well established,

it is clear that the economic implications of these endeavors

are large. As the Office of the United States Trade Repre-

sentative estimated, intellectual property theft worldwide

costs U.S. companies at least $250 billion a year, a stagger

ing statistic considering that the copyright industries make

up approximately 6% of the U.S. gross domestic product

($626 billion) and employ 4% of the U.S. workforce (U.S.

2 Dishonesty in Everyday Life and Its Policy Implications

Department of Justice 2004). Perhaps the largest contribu-

tion to consumer dishonesty comes from tax deception,

including issues such as omitting income and inflating

eductions. A recent Internal Revenue Service (IRS) study

based on special audits of randomly selected individual

income tax returns for the 2001 tax year estimates that the

“tax gap”—the difference between what the IRS estimates

taxpayers should pay and what they actually pay—is some-

where between $312 billion and $353 billion annually.

These numbers translate into an overall noncompliance rate

of 15% to 16.6% (Herman 2005).

These examples represent only a subset of everyday

deception by companies, individuals within companies, and

individual consumers. Together, they contribute to the U.S.

economy losing hundreds of millions of dollars in tax rev-

enues, wages, and investment dollars, as well as hundreds of

thousands of jobs each year.

As the damages to society’s

welfare become more apparent, substantial money is being

invested in special governmental task forces (e.g., the

Department of Justice’s task force for intellectual property

issues), programs, and laws to fight dishonest behavior.

However, little has proved successful so far. For example,

although the IRS is ramping up its audits on high-income

taxpayers and corporations, focusing more attention on abu-

sive shelters, and launching more criminal investigations,

the overall tax gap has not changed much as a reaction to

these measures. As IRS officials publicly state, too many

audits result in no change in the amount of taxes paid. That

means that these large and expensive efforts for increased

compliance seem to be a huge waste of time and money for

the taxpayer and the IRS (Herman 2005).

Similar disappointing results can be observed, for exam-

ple, in industry antipiracy measures, such as investing in

technologies for better copy protection of CDs and DVDs,

blocking unauthorized downloads, improving consumer

identifiability, and increasing the number of litigations. Evi-

dence for the number of litigations was reported in a recent

article at law.com, stating that music industry lawsuits

against individuals have been ineffective at cutting peer-to-

peer music swapping. Although the industry measures seem

to have contributed to an increased awareness of copyright

laws and lawsuit campaigns, people seem relatively unin-

timidated by them. An April 2004 survey revealed that 88%

of children between the ages of 8 and 18 years understood

that peer-to-peer music downloading is illegal, but despite

this, 56% of these children admitted to continued music

downloading (Von Lohmann 2004).

Given this limited success in curbing dishonest behavior,

there are two possible approaches for understanding and

limiting future dishonesty. The first approach assumes that

the current strategy for curbing dishonesty is the correct one

but that it is not practiced sufficiently or with sufficient

force. With this approach, the major two variables—the

probability of being caught and the magnitude of punish-

ment—should increase, thus reducing or eliminating dis-

honesty. At the extreme, this would mean “cutting off the

right arm” for minor crimes and cutting more important

organs for more severe crimes. The second approach, which

is the one we take in this article, questions whether the typ-

ical path taken to reduce dishonesty (i.e., increasing the

probability of being caught and the magnitude of punish-

Journal of Public Policy & Marketing 3

ment) is the correct path. In the next section, we elaborate

on these two approaches. The first approach falls under the

standard rational model, and the second one falls under the

sychological theory of honesty.

Economic and Psychological Theories of

(Dis)Honesty

Economic Theories of the Effect of External

Incentives

The standard economic perspective of the Homo economi-

cus is one in which the individual is a rational, selfish

human being who is interested only in maximizing his or her

own payoffs. This rational individual knows what he or she

wants and does not want and is able to perform correspond-

ing trade-offs to select the option that is expected to deliver

the greatest positive surplus (Hobbes and Macpherson 1968;

Smith and Skinner 1997, 1999). From this perspective, there

is nothing special about the decision to be honest, which

depends solely on the expected external benefits (e.g., more

money, a better position) and expected external costs (e.g.,

paying a fine, loosing a job) to the individual (Hechter 1990;

Lewicki 1984); the higher the external rewards from being

dishonest, the higher is the extent to which an individual

engages in dishonest behavior (see Figure 1). Such a cost–

benefit trade-off means that decisions about honesty are like

every other decision that individuals face.

Because this view of dishonesty has been adopted in gen-

eral, and has been adopted in legal theorizing in particular,

efforts to limit dishonesty have assumed that the only ways

to make progress are restricted to the external costs and

benefits of a dishonest act. The ensuing emphasis on the per-

vasiveness of police force and magnitude of punishment are

the two simplest ways to manipulate these external costs

(see Figure 1).

Psychological Theories of the Effect of Internal

Incentives

Internal Rewards for Virtuous Behavior

In contrast to the classic economic perspective, there is

ample evidence from different academic fields, such as psy-

chology, sociology, anthropology, behavioral and experi-

mental economics, and neuroeconomics and neuroscience,

that in addition to the external reward mechanisms, there are

also internal reward mechanisms and that these exert influ-

ence on people’s decisions. Economists such as Ernst Fehr

(see, e.g., Fehr and Fischbacher 2003, 2004; Fehr and

Gachter 2002) and James Andreoni (see, e.g., Andreoni,

Harbaugh, and Vesterlund 2003; Andreoni and Miller 2006)

have repeatedly demonstrated altruism and reciprocity in

social dilemma games. For example, in an ultimatum game,

two people have the opportunity to split a certain amount of

money through a one-time-only, anonymous interaction.

One of the two players, the proposer, offers a division of the

money. The second player, the receiver, must decide

whether he or she wants to accept or reject this proposition.

If the receiver rejects the proposed division, both players go

home without any money. If the receiver accepts the divi-

4 Dishonesty in Everyday Life and Its Policy Implications

sion, each player receives the amount that the proposer

offered. From a game theoretical, rational point of view, the

proposer should split the money unequally, in favor of him-

r herself. After all, it is a one-time game, so reciprocation

is not an issue. In addition, offering even $.01 to the second

player should make the receiver accept the offer because

that player will be better off with this amount than with

nothing. Instead, however, a majority of the offers are typi-

cally split equally, and many offers that are not split equally

are rejected. These types of results demonstrate that people

care about more than maximizing their own monetary pay-

offs and that these other considerations include social utility

and the care for others’ outcomes. Uri Gneezy (2005) con-

ducted a related study that emphasized this point in the con-

text of (dis)honesty. Gneezy used a simple deception game

with asymmetric information to demonstrate how people act

selfishly, insofar as they maximize their own payoffs, but

they are also sensitive to the costs that their lies impose on

others. These results are important when we consider daily

deception because there are many differences in wealth

(e.g., between employees and employers, between con

sumers and corporations) and in perceptions of the cost that

deception creates for the other party. Essentially, these

results suggest that people will be more dishonest when they

face wealthier counterparts and when the cost of the decep-

tion for these counterparts seems lower.

Thus, an important question for economists is, Why do

people consider more than “just” their material payoffs? To

address this question, Joseph Henrich and colleagues (2001)

undertook a large cross-cultural study of behavior in ultima-

tum, public good, and dictator games. They analyzed the

behavior of people from 15 small-scale societies in 12 coun-

tries exhibiting a wide variety of economic and cultural con-

ditions. The sample consisted of foraging societies; societies

that practice slash-and-burn horticulture; nomadic herding

groups; and sedentary, small-scale agriculturalist societies.

Two of their main findings in support of the hypothesis of

internalized reward mechanisms are that (1) the observed

behavior varied substantially across societies and (2)

people’s preferences were not exogenous as the classical

model would predict but rather were shaped by their soci-

ety’s characteristic economic and social interactions of

everyday life. In other words, socialization is a key to the

development of internalized reward mechanisms.

Adding to the behavioral evidence for internal rewards,

recent findings from neuroscience and neuroeconomics pro

vide further credence for the existence of internalized

reward mechanisms and point to the brain structure that

might be implicated in their activation. Thanks to the recent,

rapid diffusion of brain-imaging studies, such as positron

emission tomography or event-related functional magnetic

resonance imaging, groundbreaking developments have

added more pieces to the puzzle of reward processing. Sev-

eral studies in these fields have identified certain regions in

the dorsal and ventral striatum, especially the caudate

nucleus and the nucleus accumbens, to represent a brain’s

pleasure center that can be activated through different forms

of rewards (see also related studies in rats and primates; e.g.,

Olds and Milner 1954; Schultz et al. 1992). For example,

human beings show significantly increased striatal activity

during the anticipation of monetary gains (Knutson et al.

Journal of Public Policy & Marketing 5

2001), pleasant tastes (O’Doherty et al. 2002), or beautiful

faces (Aharon et al. 2001). More important for our point,

however, is that the same brain regions are also activated in

nticipation of satisfying social outcomes (i.e., social

rewards). Rilling and colleagues (2002) show how the stria-

tum “lit up” when people rewarded cooperators. Seemingly

contrary to these findings, De Quervain and colleagues

(2004) report similar findings when people punished defec-

tors; this result holds even if the punishment was possible

only at a personal material cost. Together, these two studies

suggest that people feel good about complying with inter-

nalized social norms and values; that is, someone who coop-

erates

should be rewarded, and someone who defects should

be punished to reestablish socially desirable behavior.

Psychology has long argued on behalf of internal reward

mechanisms. Most notably, Sigmund Freud and colleagues

(Freud 1933; Freud and Strachey 1962; Freud, Strachey, and

Gay 1989) lectured extensively about the superego, that is,

the part of the self that represents society’s moral norms and

values that the individual internalizes during the course of

his or her early life (see also Campbell [1964] on the inter

nalization of moral norms). The superego acts as an internal

judge, rewarding or punishing the individual depending on

compliance with these norms and values.

Activation of Internal Rewards Lessens Sensitivity to

External Incentives

On the basis of the evidence of internal reward mechanisms

described, Mazar, Amir, and Ariely (2005) studied how

external and internal reward mechanisms work in concourse

to influence people’s decisions to be (dis)honest. The gen-

eral procedure was to contrast financial reward incentives

that favor dishonest behavior with people’s inherent moti-

vation for honest behavior. Taking the motivation for finan-

cial rewards as self-evident, Mazar, Amir, and Ariely tested

the extent to which the decision to be (dis)honest is driven

by the possible consequences of being caught cheating

(external costs) relative to the internal rewards of honesty.

In one of the experiments, participants were presented with

a set of 50 multiple-choice, general-knowledge questions

and were promised $.10 per answer they solved correctly

within 15 minutes.

There were four different between-subjects conditions

that differed in procedure after participants finished answer

ing the questions on the original test sheets. The four condi-

tions were (1) experimenter graded (control), (2) self-graded

(self), (3) self-graded plus shredding (self+), and (4) self-

graded plus shredding plus self-payment (self++). In the

control condition, participants were told that when they fin-

ished answering the questions, they should ask the experi

menter for a bubble answer sheet (a sheet with circles to

indicate the answers, much like those used for exams that

are scanned and graded electronically) on which to transfer

their answers and then take both forms to the experimenter,

who would check their performance and pay them.

In the self condition, participants were told that when they

finished answering the questions on the original test sheet,

they should ask the experimenter for a premarked bubble

answer sheet, which included the same circles as in the con

trol condition but with one of the answers premarked as

being the correct answer. The respondents’ task was to

6 Dishonesty in Everyday Life and Its Policy Implications

transfer their own answers to the bubble answer sheet and

then to count and write down the number of correct answers.

When this was completed, they were asked to take both

orms to the experimenter, at which point they would be

paid accordingly. In this condition, participants had the pos-

sibility to cheat at the risk that the experimenter might dis-

cover it.

The self+ condition was similar to the self condition,

except that participants were instructed that after they trans-

ferred their answers to the premarked answer sheet, they

should walk to a shredder, shred their original test sheet, and

take only the answer sheet to the experimenter, at which

point they would be paid accordingly. This condition

offered a lower probability of being caught cheating than the

self condition. Indeed, there was no legal way of proving

that anyone cheated. The experimenter could be suspicious

only about an atypical high number of correct answers.

Because this social interaction could make cheating par-

ticipants feel uncomfortable, Mazar, Amir, and Ariely

(2005) decreased the chance of being caught even further in

the final condition (self++). In this condition, participants

were instructed to shred both their test sheet and the answer

sheet and then to walk over to a large jar with money that

was sitting at the end of the table and take the amount that

they earned.

This study had four important findings: First, participants

in the external condition solved significantly fewer ques-

tions than the participants in the three self conditions.

Because there was no reason to believe that the skill level of

the participants was different in any of these conditions, this

result implies that external reward mechanisms exist, and

people are dishonest when it is good for them. This result is

also along the lines of Schweitzer and Hsee’s (2002) find-

ings, according to which participants are more likely to be

dishonest as the private information they have becomes

more ambiguous.

Second, there was no significant difference between the

three self conditions, though the probability of being caught

further decreased dramatically from the self to the self+ to

the self++ condition (thus, the fear of being caught should

also have decreased). This result provides direct evidence

that the external disincentives for dishonesty are only a part

of a more complex picture.

Third, the magnitude of dishonesty in the three self con-

ditions was relatively small. Participants cheated only 20%

of the possible average magnitude and thus were far from

maximal dishonesty, as the standard rational model would

predict. This result suggests that people seem to possess

internal reward mechanisms for honesty because when

given the opportunity and incentive to be dishonest, they

exhibited dishonest behavior, but this dishonest behavior

was limited in its extent (probably by the strength of their

internal reward mechanisms).

Fourth, these results suggest that, at some level, the act of

cheating itself can activate the internal reward mechanism.

This means that though low levels of dishonesty might go

“unnoticed” from the point of view of the internal reward

mechanism, at some point, the magnitude of dishonesty

itself can activate this mechanism and limit dishonest

behavior.

Journal of Public Policy & Marketing 7

Together, these findings suggest that the relationship

between the external and the internal reward mechanisms is

complex. In particular, we hypothesize that the internal

eward mechanism is either active or inactive (in the same

way that people categorize actions and people as honest or

dishonest rather than in a more continuous way) and influ-

ences the tendency for acting (dis)honestly as a step func-

tion: First, below a certain level of dishonesty, the internal

reward mechanism may not be activated at all and thus does

not influence behavior; that is, the propensity for dishonesty

in such cases is a function of external cost–benefit consider-

ations (see Figure 1). Second, beyond the activation thresh-

old, when the dishonest act is noticeable, the internal reward

mechanism is activated and, at least within a certain range,

exerts its maximal force independently of the level of exter-

nal rewards. As a consequence, when a person’s internal

standards become activated, they override the sensitivity to

external rewards such that the propensity for dishonesty

becomes independent of increased external rewards for

being dishonest (within a certain range). Third, arguably, it

is likely that when the external rewards become very large,

they become tempting and may ultimately prevail. That is,

at some point, a person’s internal standards could be over-

ridden or deactivated such that the causes for dishonesty

preclude such internal considerations and are based solely

on planned dishonesty (a cost–benefit analysis as theorized

by the standard rational model). Figure 2 sketches the

hypothesized relationship of these components, as Mazar,

Amir, and Ariely’s (2005) findings illustrate. These findings

and the contrast between Figures 1 and 2 suggest that a

model for honesty that assumes that people behave like a

Homo economicus would lead to different predictions about

a person’s decision to be (dis)honest and, to the extent that

these assumptions are wrong, to incorrect prescriptions for

the prevention of deception.

Changing the Activation Threshold for Internal Rewards

Note that all the research we discussed supports the theory

that internal reward mechanisms indeed exist. However,

there is also research that suggests that it is possible to move

the activation threshold, that is, to cause internal reward

mechanisms for honesty to be more active, or to “kick in”

earlier. Representative of this kind of evidence is the exten-

sive body of research in psychology on objective self-

awareness by Duval and Wicklund (1972). According to

Duval and Wicklund, objective self-awareness represents

attention directed inward that induces self-evaluation in

relation to standards that are salient or accessible in the

immediate situation, which in turn increases motivation to

meet the standard (see also Carver and Scheier 1998). Par

ticular situations such as being in front of a real or implied

audience (Duval and Wicklund 1972), being individualized,

standing in front of a mirror (Carver and Scheier 1978), or

writing short stories about oneself (Fenigstein and Levine

1984) can increase an individual’s awareness of him- or her-

self as an object in the world. When awareness of the self is

increased, people are also more likely to be aware of dis-

crepancies between how they want to view themselves (the

ideal self) and how they actually behave. Given this tension

and the discomfort it can create, people who are aware of it

might work actively to reduce this discrepancy by either

8 Dishonesty in Everyday Life and Its Policy Implications

shifting attention away from the self or changing their

behavior to act more in accordance with their ideal self. In

the domain of deception, this means that higher self-

wareness might lead to more honest behavior.

Beaman and colleagues (1979) provide a well-known

example of the effect of self-focused attention on increasing

the alignment between behavior and internal standards. In

this famous experiment, which was conducted during Hal-

loween, trick-or-treating children entered a house and were

told by the experimenter to take only one candy; then, the

experimenter left the children alone in front of the candies.

They found that children who were individualized by being

asked their names and addresses were more likely to take

only one candy. In addition, these children were even more

likely to take only one candy when there was a mirror

directly behind the candy bowl. Mazar, Amir, and Ariely

(2005) use a different manipulation to influence self-

awareness; specifically, they use a manipulation that is more

directly related to honesty to test whether an increased

awareness leads to more honest behavior on a math test. In

their experiment, participants were told to write down either

as many of the Ten Commandments as they could remem-

ber (increased self-awareness of honesty) or the names of

ten books that they read in high school (control). They had

two minutes for this task before they moved on to an osten-

sibly separate task: the math test. The task in the math test

was to search for number combinations that added up to

exactly ten. There were 20 questions, and the duration of the

experiment was restricted to five minutes. After the time

was up, students were asked to recycle the test form they

worked on and indicate on a separate collection slip how

many questions they solved correctly. For each correctly

solved question, they were paid $.50. The results showed

that students who were made to think about the Ten Com-

mandments claimed to have solved fewer questions than

those in the control. Moreover, the reduction of dishonesty

in this condition was such that the declared performance

was indistinguishable from another group whose responses

were checked by an external examiner. This suggests that

the higher self-awareness in this case was powerful enough

to diminish dishonesty completely. Yet another method that

proved successful in increasing self-awareness with the con-

sequence that students cheated less on that math test was to

make students sign an honor code before beginning the test.

This finding is particularly interesting because it provides

some evidence for the effectiveness of a simple commitment

device that schools, companies, and the government can

easily adopt.

A different kind of research that can be interpreted in line

with the self-awareness theory is based on Daniel Schachter

and colleagues’ work on the role of emotional arousal for

moral behavior. For example, Schachter and Latane (1964)

tested the effects of a tranquilizer in a situation in which par-

ticipants could cheat. They found that participants cheated

significantly more after having taken the tranquilizer, a sym-

pathetic inhibitor, than did the placebo controls (see also

Schachter and Singer 1962). These results suggest that the

activation of the threshold is based on arousal and that when

arousal is decreased (even by artificial means, such as a

tranquilizer), the threshold is less likely to be activated, and

thus dishonesty is likely to be more prevalent. This idea is

Journal of Public Policy & Marketing 9

further developed by Dienstbier and Munter (1971), who

show that it is not emotional arousal per se that influences

the tendency to cheat but rather a person’s understanding or

nterpretation of the meaning and significance of that

arousal (see also Dienstbier 1972, 1975).

Self-Deception

hus far, the discussion has focused on deceptive acts and

he activation of a threshold that ignites the internal rewards.

In our conceptualization of the threshold, it is important that

the amount of deception in and of itself can activate the

threshold. An added complexity comes from the idea of self-

deception, in which people can reframe an act in a way that

makes them not perceive it as dishonest. Under such refram-

ing (self-deceptions), dishonest acts would not contribute to

the activation of the threshold and thus would not influence

the tendency for honesty. As a consequence, even if an indi-

vidual has internalized standards for honesty, acts of dis-

honesty that do not influence the activation of the threshold

(self-deceptions) would not influence behavior, and the rela-

tionship between external rewards and the tendency for dis

honesty would remain in Zone 1 of Figure 2 (never reaching

the threshold).

In general, self-deception represents a biased, self-serving

information flow within an individual—that is, an active but

unconscious misrepresentation of reality to the conscious

mind (Trivers 2000). Although it seems to be a paradox that

a person could deceive him- or herself, casual observation

suggests that people are effective in maintaining unrealisti-

cally positive views of themselves. People maintain beliefs

in their intelligence, competence, and moral worth in the

face of their sometimes foolish, incompetent, and immoral

behavior. Similarly, people frequently estimate that they

are, for example, better, more intelligent, or more beautiful

than average. Because typically far more than 50% of

people estimate this “better-than-average” effect, aggregat-

ing these data clearly violates logic (e.g., Alicke et al. 1995).

Other researchers have shown how people can be led to

believe false or biased “facts” about their own past (see

research on memory distortion and suppression of unwanted

memories; e.g., Anderson, Cohen, and Taylor 2000; Loftus

1994; Schachter and Dodson 2002), and they can convince

themselves of certain motivations for their behavior, thus

hiding their true intentions. Therefore, self-deception can be

successful even in the most extreme cases: For example,

doctors who participated in genocide in Nazi Germany man-

aged to convince themselves of the rectitude of their actions

(Lifton 1986).

Although self-deception can be beneficial in the short run

because it enables people to maintain self-regard, the

inflated self-perception can be problematic in the long run

when that bogus self-regard has costs. Norton and Ariely

(2005) show this in the context of an IQ test. In one of Nor-

ton and Ariely’s experiments, people participated in two

sequential IQ tests. Half of the participants in the first test

were provided with an answer key on the bottom of their test

sheet, whereas the other half did not have an answer key.

When the first test was over, each participant learned how

many questions he or she solved correctly. After that, they

were asked to predict how many questions they would solve

10 Dishonesty in Everyday Life and Its Policy Implications

on a second, similar test without an answer key. The predic-

tion task was designed such that people had a monetary

incentive to be accurate. Payment depended more on the

ccuracy of their predictions and less on their performance

such that the dominant strategy was to predict accurately.

The results of this experiment show that in the first round,

participants who had the answer key performed better on the

test than participants without the answer key and that there

was no performance difference on the second IQ test when

none of the participants were provided with an answer key.

This result suggests that the presence of the answers allowed

participants to solve more problems correctly. More impor-

tant, it seems that participants who had the answer key in the

first test believed that this better performance was actually

due to their greater intelligence, as reflected in their higher

estimates of their performance on the second test. As a con-

sequence, participants who deceived themselves by having

an inflated perception of themselves made less money.

Notably, when Norton and Ariely (2005) asked a different

group of people to predict how they would perform in such

an experiment, participants predicted that if they had the

answer key on the first test but not on the second, they

would perform better on the first test but not on the second

test. This result suggests an added danger of self-deception,

namely, that people believe that they are immune to it.

Researchers have explained this paradox of not knowing

about self-deception under the assumption that a person can

simultaneously store both true and false knowledge, with a

bias toward the true knowledge being stored in the uncon-

scious and the false (i.e., misrepresented) knowledge being

stored in the conscious (Greenwald 1997). Trivers (2000)

points out that from an evolutionary standpoint, this way of

organizing knowledge has the advantage that self-deception

not only must act primarily in the service of fooling oneself

but also can act in the service of deceiving others. The latter

is true because an outside observer initially interacts with

the conscious mind of the deceiver, and if the deceiver is

also deceiving him- or herself, the conscious mind com-

prises only the false information. The true information

would be hidden in the unconscious. If this is the case, cues,

such as a higher-pitched voice, increased pupil size, or lip

pressing, which in general accompany attempted, conscious

deception, should not be available to the observer, thus mak-

ing the deceit more difficult to detect (DePaulo and Morris

2004). As a consequence, even if people are fully self-aware

(i.e., internal reward mechanism is active) and the net utility

of deception is negative (i.e., costs loom larger than bene-

fits), deception that eludes the person who is committing the

dishonest act (i.e., self-deception) might not completely

vanish.

Policy Guidelines for Reducing

Dishonesty

The standard rational model of decisions about honesty and

dishonesty assumes that people trade off only external costs

and benefits of an outcome. In contrast, the psychological

model we have sketched assumes that decisions about hon-

esty also include considerations of internal reward mecha

nisms. In addition, we argue that decisions about honesty

can sometimes be not cognizant, for example, at levels of

Journal of Public Policy & Marketing 11

activation below the threshold or when self-deception is

involved. As a consequence, making the right policy recom-

mendation to decrease dishonesty depends particularly on

he analysis of what is driving the deceit in a particular situ-

ation. Our literature review suggests that there are four gen-

eral drivers of dishonesty: (1) lower external costs and rela-

tively higher benefits of deception; (2) lack of social norms,

which results in a weak internal reward mechanism; (3) lack

of self-awareness, which primes the activation of the inter-

nal reward mechanism; and (4) self-deception. In the fol-

lowing subsections, we elaborate on how these different per-

spectives on dishonesty can translate into different

approaches for reducing or curbing dishonesty.

When Dishonest Behavior Is Caused by External

Rewards

If the cause for deception lies solely in greater external

benefits than costs of the dishonest act, the solution is sim-

ple: The costs for dishonest actions must be greater than

their expected benefits. This can be achieved by increasing

either the probability of being caught or the severity of the

punishment. Thus, if the cause of dishonesty is based solely

on an imbalance of external costs and benefits, the standard

legal approach of controlling the external costs is appropri-

ate. This theory implies that it is appropriate to introduce

governmental task forces, such as the Department of Jus-

tice’s task force on intellectual property, which, among

other combat strategies, invests in increasing the number of

specially trained prosecutors. The same is true for the IRS’s

increase in audits and the music industry’s aggressive

increase in filing lawsuits against individual deceivers.

Even if the cause for deception is related to the cost–

benefit analysis, there might be ways to increase the effec-

tiveness and efficiency of measures to combat dishonest

behaviors. For example, if the probability of being caught

and the magnitude of punishment are evaluated differently,

and research suggests that the probability of punishment is

more important than increasing the severity of the punish-

ment (Nagin and Pogarsky 2003), it might be best to allocate

efforts accordingly. However, even if legislators decide to

invest more effort in the probability of detection and

decrease the magnitude of punishment (e.g., moving from a

$500 fine for not stopping at a stop sign with 10% probabil-

ity of being caught to a $100 fine with a 50% probability of

being caught), there is still the question of what is the opti-

mal probability for deterrence.

Informing the question of what is the optimal probability

for deterrence, research by Barkan, Zohar, and Erev (1998)

suggests that the best approach is eliminating altogether the

probability of being caught, that is, moving to nonproba-

bilistic punishments. Their main argument is that events that

have low probability are unlikely to occur (by definition)

and thus can have a perverse effect on learning, such that

people who violate the rule and are not caught receive a

positive reward for the violation, which causes them to

underestimate the probability of being caught and, over

time, increases their tendency to behave in this undesired

way (see also Erev et al. 2003). According to this perspec-

tive, a person who expects that driving through a red light

would involve a $500 fine in 5% of the cases is more likely

12 Dishonesty in Everyday Life and Its Policy Implications

to drive through it than a person who has the same expected

value but with certainty of being caught (i.e., a definite $25

fine). More important, over time, the person in the proba-

ilistic punishment setting is going to discount the probabil-

ity of the punishment further (as long as he or she is not

caught), which in turn will lead to an even greater tendency

for violation. Eliminating the probabilistic component from

all undesirable behaviors is impossible, but it is clear that

there are some cases (e.g., driving through an intersection at

a red light) in which this is possible and desirable.

When Dishonest Behavior Is Caused by the

Internal Reward Mechanism

If the reason for dishonest actions lies in a lack of internal-

ized social norms, our primary recommendation would be to

invest in educational efforts and socialization to increase the

strength of the internal reward mechanism. The key ques-

tions in this context are, How can this best be done, and is

there a critical age period for the internalization of such

mechanisms (as in language and visual development)? For

example, educational efforts can be integrated in schools,

social clubs, or religious institutions. Another possibility

that is increasingly exercised by the government and the

music, film, and software industries is to feature public mes-

sages in an attempt to build a social norm so that a particu-

lar type of behavior (e.g., illegally downloading music or

movies) becomes socially undesirable and frowned on.

Other efforts could illustrate how such acts can hurt the

rank-and-file workers, not just the big corporations, by

reducing their job security or pay (see, e.g., television adver-

tisements and movie trailers launched by the Motion Picture

Association of America in 2003 and 2004).

When the effects of such efforts on the development of

socially based internal reward mechanisms are understood,

it is important to go a step further and ask what the limits of

such efforts should be and whether society should allow all

ideologies to participate in the creation of such internal

rewards (e.g., what about racial prejudices or particular

cults?). The question about the types of internal reward

mechanisms that society could develop or not develop is

particularly important if we consider the likely possibility

that this process might have a critical period in which

younger people are much more sensitive to such influences

and that when the critical age is reached, these mechanisms

remain relatively stable for the rest of their lives. Given the

higher sensitivity of younger adults to social influence and

advertising, society might want to place careful boundaries

for the development of such socially based internal repre-

sentations by different interested parties, such as religious,

financial, and social institutions.

If dishonest behavior occurs not because of a lack of

social norms but simply because of a lack of self-awareness

and, thus, the degree to which these internalized social

norms are activated, it is important to make use of contex-

tual cues that increase awareness when deception is about to

happen, namely, at the point of temptation. For example, the

IRS could slightly change its forms by making them more

personal or by asking people to sign an honor code of sorts

before they begin filling out the forms. Another possibility

worth trying might be to include a survey that asks tax pay

Journal of Public Policy & Marketing 13

ors questions such as how much they care about their coun-

try, how important honesty was to their parents, how many

people they think lie on their taxes, or what the typical pro-

ile is of tax deceivers.

The consideration of internal rewards also suggests that

the theory of optimal punishment (optimal punishment

trades off the benefits of deterrence and the cost of punish-

ing innocent people) should be reconsidered with these

inputs in mind. If the punishment magnitude is determined

in a way that makes the costs slightly higher than the bene-

fits and if these costs also include internal costs, the optimal

punishment will be lower by that amount. For example, if

the expected benefit for a particular crime is Y and the inter-

nal reward for honesty is X, the standard rational model

would prescribe a punishment with an expected magnitude

of –(Y +

ε), whereas the model that includes internal

rewards would prescribe –(Y +

ε) + X. The complexity is

that not everyone has the same level of internal reward

mechanisms, and to the degree that these are unobservable,

it is difficult to assess the true level of optimal punishment

(though it is possible that someday there will be a test for

this). Conversely, signs of repeated criminal behavior, for

example, can be taken as an indication for a lower level of

internal reward mechanisms, causing the magnitude of X to

be updated as lower. This type of framework, in which X is

an individual variable, has the potential to help build a

theory of repeated punishment with the same desired princi-

ples of optimal punishment but with more effectiveness.

(Currently, repeated crime is punished more severely, such

as in California’s “three-strikes-and-you’re-out” approach,

but there is no theory or logical guideline for the magnitude

of these policies.)

When Dishonest Behavior Is Caused by Self-

Deception

Finally, deception of the self-deception variety is difficult to

fight. Self-deception due to a self-serving bias is very

robust. Several academics have shown that paying people to

be more realistic in their view, making people write essays

that argue the other side’s point of view, or educating people

about the self-serving bias are not successful in debiasing

people (see, e.g., Babcock and Loewenstein 1997; Babcock,

Loewenstein, and Issacharoff 1997). Therefore, the most

successful way to fight self-deception might be to eliminate

the incentives that spawn the bias and simply eliminate the

situations that can give rise to this type of behavior. For

example, Bazerman, Loewenstein, and Moore (2002; see

also Bazerman and Loewenstein 2001) argue that if decep-

tive audits by accounting professionals are mainly due to

self-deception, it might be more effective to pass laws or

enforce standards among the accounting profession that bar

auditors from offering both consulting and tax services to

clients, prohibit hiring accountants through clients, and

allow only limited-time contracts. As these examples show,

fighting deception caused by self-deception requires serious

interventions that limit substantially the freedom and self-

determination of people in certain situations.

14 Dishonesty in Everyday Life and Its Policy Implications

Conclusion

In summary, there is no question that dishonesty is prevalent

in daily life. The standard economics perspective considers

one cause for dishonesty—external reward mechanisms—

and thus emphasizes the probability of being caught and the

agnitude of punishment as the only ways to overcome dis-

onesty. In contrast, the psychological perspective we pre-

sent herein suggests that dishonesty is also influenced by

internal reward mechanisms and that such mechanisms

should be taken into account when considering effective

measures for limiting dishonesty in daily life. Moreover, the

psychological perspective suggests that internal and external

rewards are not simply additive but also take a particular

functional form (see Figure 2). With this functional form in

mind, the psychological approach for reducing dishonesty

could be based on increasing the long-term effectiveness of

internal rewards (education), increasing the short-term

effectiveness of internal rewards (contextual cues), or elimi-

nating the possibility of dishonest acts when the cause could

be attributed to self-deception. When the role of internal

rewards is better understood, both preventions and punish-

ments of dishonesty can be made more effective and

efficient.

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18 Dishonesty in Everyday Life and Its Policy Implications

Not everybody loses in every dishonest act; those who committed the

act can gain.

We assume that the external reward mechanism as postulated by classic

economics is always active in at least normally healthy people.

Journal of Public Policy & Marketing 19

20 Dishonesty in Everyday Life and Its Policy Implications

Figure 1. The Relationship Between Expected Net Benefits

of Dishonesty and the Propensity for Dishonesty

ccording to a Theory That Includes Only

xternal Rewards

Journal of Public Policy & Marketing 21

Notes: Mazar, Amir, and Ariely’s (2005) results show that dishonesty itself

can activate the internal reward mechanisms, which in turn interrupt

the standard relationship between external rewards and the propen-

sity for being dishonest (as postulated by classic economics).

Figure 2. The Relationship Between Expected Net Benefits

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ased on the Results of Mazar, Amir, and

riely’s (2005) Study

Discussion

According to Freud the superego incorporates the values and morals which are learned from one's parents and society. The superego's function is to control our impulses and it also has the function of persuading the ego to turn to moralistic goals and to strive for perfection. > ***The superego acts as an internal judge, rewarding or punishing the individual depending on compliance with these norms and values.*** You can learn more here: [Id, Ego and Superego](https://www.simplypsychology.org/psyche.html) The internal reward mechanism that curbs dishonest behavior can be either active or inactive. Below a certain threshold of dishonesty it will be inactive and it will not influence human behavior, and thus the propensity for dishonest behavior is only a function of external rewards. Above the dishonesty threshold the internal reward mechanism becomes active and seems to influence behavior drastically so much so that it seems to become independent of external rewards. But, when external rewards become very large the internal reward mechanism seems to be completely overridden and we planned dishonesty (a cost–benefit analysis as theorized by the standard rational model). ![dishonest](https://i.imgur.com/kdORQPD.png) **Self-deception** represents a biased, self-serving information flow within an individual. I is an active and unconscious misrepresentation of reality to the conscious mind . **There are four general drivers of dishonesty: ** 1. lower external costs and relatively higher benefits of deception 2. lack of social norms, which results in a weak internal reward mechanism 3. lack of self-awareness, which primes the activation of the internal reward mechanism 4. self-deception A theory that only takes into account external benefits states that the propensity for dishonesty will increase as the net gains for the dishonest person increase. The more you have to gain the more likely you are to lie independent of any other factors like the losses you are causing to a third party. !["external benefits"](https://i.imgur.com/XDqEY0j.png) *Degree of deception according to a theory that includes only gains for the dishonest person. Deception increases linearly as the gains increase.* Dan Ariely - (Dis)Honesty [![](https://i.imgur.com/KbEgb4R.jpg)](https://www.youtube.com/watch?v=nXH9rJZtkYo) From the Accenture Survey: > ***"one-fourth (24 percent) said they believe that the people who commit insurance fraud do so because they believe they pay too much for insurance. Twenty percent said they believe that the offenders commit fraud to compensate for the claims deductibles they have to pay."*** You can learn more here: [Accenture Survey: One-Fourth of Americans Say It’s Acceptable to Defraud Insurance Companies](https://newsroom.accenture.com/industries/insurance/one-fourth-americans-say-its-acceptable-to-defraud-insurance-companies-accenture-survey-finds.htm) #### Ultimatum Game: There are two players involved in an ultimatum game: - The proposer who is endowed with a sum of money. The proposer is tasked with splitting it with another player, the responder. - The responder will receive a certain amount of money from the proposer and will decide whether to accept it or refuse. Once the proposer communicates their decision, the responder may accept it or reject it. If the responder accepts, the money is split per the proposal; if the responder rejects, both players receive nothing. Both players know in advance the consequences of the responder accepting or rejecting the offer. When people lie they care about more than simply maximizing their own monetary pay offs. People are sensitive to their gains when deciding to lie but they also care about how much the other side loses with their lie. This "unselfish" motive decreases as the size of the gains increases. You can learn more here: [Deception: The Role of Consequences](https://rady.ucsd.edu/faculty/directory/gneezy/pub/docs/deception.pdf) !["deception gains"](https://i.imgur.com/UgzXSaT.png) *Deceptions seems to decrease if the losses to the third party are big. We care about gains but also take into account the losses that are decisions inflict on other. If the gains are big the unselfish motive is not taken into account. * Proposed solution to curbing dishonest behavior for different scenarios: **Dishonest Behavior Is Caused by the External Reward Mechanism** - If the cause for deception lies solely in greater external benefits than costs of the dishonest act, the solution is simple: The costs for dishonest actions must be greater than their expected benefits. This can be achieved by increasing either the probability of being caught or the severity of the punishment. - function of probability of being caught and magnitude of punishment (500 dollar fine with 5% probability or 25 dollar fine with 100% probability) **Dishonest Behavior Is Caused by the Internal Reward Mechanism** - invest in educational efforts and socialization to increase the strength of the internal reward mechanism. - build a social norm so that a particular type of behavior (e.g. not paying for public transportation) becomes socially undesirable and frowned on. - younger people might be much more sensitive to such influences and that when the critical age is reached, these mechanisms remain relatively stable for the rest of their lives **Dishonest Behavior Is Caused by Self-Deception** - Self-deception is very robust and difficult to fight. - the most successful way to fight self-deception might be to eliminate the incentives that spawn the bias and simply eliminate the situations that can give rise to this type of behavior - fighting deception caused by self-deception requires serious interventions that might limit substantially the freedom and self-- determination of people in certain situations Dan Ariely is a professor of Psychology and Behavioral Economics at Duke University and is the founder of The Center for Advanced Hindsight. He is the author of Dollars and Sense, Predictably Irrational, The Upside of Irrationality, and The Honest Truth about Dishonesty. Nina Mazar is a a Professor of Marketing and Behavioral Science and the co-director of the Susilo Institute for Ethics in the Global Economy at the Boston University Questrom School of Business. Her main research topics focus on how expectations, emotions, peers, and random cues in the environment affect how we think about products, money, investments, and morality, and their implications for welfare, development, and policy Learn more about: - Dan Ariely: [All About Dan](http://danariely.com/all-about-dan/) - Nina Mazar: [About Nina](http://ninamazar.com/about-nina/) ### TL;DR The standard economics perspective considers only one cause for dishonesty: external reward mechanisms. That implies that humans would be solely motivated by increasing their net gains and thus in order to overcome dishonesty the only variables that need to be taken into account are: 1. the probability of being caught 2. and the magnitude of punishment In contrast, **the authors suggest that dishonesty is also influenced by internal reward mechanisms and that such mechanisms should be taken into account when considering effective measures for limiting dishonesty in daily life.** The solution they propose for different scenario are: **Dishonest Behavior Is Caused by the External Reward Mechanism** - If the cause for deception lies solely in greater external benefits than costs of the dishonest act, the solution is simple: The costs for dishonest actions must be greater than their expected benefits. This can be achieved by increasing either the probability of being caught or the severity of the punishment. - function of probability of being caught and magnitude of punishment (500 dollar fine with 5% probability or 25 dollar fine with 100% probability) **Dishonest Behavior Is Caused by the Internal Reward Mechanism** - invest in educational efforts and socialization to increase the strength of the internal reward mechanism. - build a social norm so that a particular type of behavior (e.g. not paying for public transportation) becomes socially undesirable and frowned on. - younger people might be much more sensitive to such influences and that when the critical age is reached, these mechanisms remain relatively stable for the rest of their lives **Dishonest Behavior Is Caused by Self-Deception** - Self-deception is very robust and difficult to fight. - the most successful way to fight self-deception might be to eliminate the incentives that spawn the bias and simply eliminate the situations that can give rise to this type of behavior - fighting deception caused by self-deception requires serious interventions that might limit substantially the freedom and self-- determination of people in certain situations > *** "socialization is a key to the development of internalized reward mechanisms." *** This study found that in all societies studied: 1. Ultimatum game offers were strictly positive and often substantially in excess of the expected income-maximizing offer. Rejections of positive offers in some societies also occurred at a considerable rate. 2. Preferences over economic choices are not merely influenced by external factors but rather seem to be shaped by the economic and social interactions of everyday life. Learn more about this study here: [In Search of Homo Economicus: Behavioral Experiments in 15 Small-Scale Societies](https://www.umass.edu/preferen/gintis/Anthro%20AER%202001.pdf)

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