Anyone's ethics can be shaped by financial gain. Keep in mind that Webster's dictionary defines ethics as "the discipline dealing with what is good and bad, and with moral duty and obligation."
THE ULTIMATUM GAME
Step outside financial planning for a moment and consider a game that involves ethics. In the Ultimatum Game, there are two players and an experimenter. Here's how it's played: The experimenter gives $10 to the first player, who decides how much of it to give to the second player. (The game is played only once, so reciprocation is not an issue.) The second player then decides whether to accept the amount given by the first player. If the second player accepts, the players keep the money and divide it as the first player proposed; if he rejects the offer, all $10 goes back to the experimenter.
In cases in which Player 1 offered only $2 to the second player, there were many instances in which Player 2 rejected the offer and all $10 went back to the experimenter. In that case, Player 2 decided that the amount shared by Player 1 was unfair and righted the wrong - by giving up $2.
Traditional economics predicts that since Player 2 would be enriched financially and therefore better off by accepting the proposal, he would always keep the $2. Yet this game demonstrates that if Player 2 feels Player 1 has acted in an unfair manner, he is willing to right the wrong by giving up the $2.
What if we raised the stakes a bit? Would behavior change? Say the game was played with $10 million and Player 1 shared the same 20%, amounting to $2 million. Though I wanted to try playing this game with 100 pairs of participants, I unfortunately found myself $1 billion short on funding. So I posted this question on the Bogleheads forum, a group of very smart investors. A full 91% said they would be more likely to accept the $2 million than they would be to accept $2 in the $10 game. Player 1 was just as unfair, keeping 80% of the money but, not surprisingly, Player 2 was not as willing to forgo $2 million to right this wrong.
In reviewing the results, Dan Ariely, a professor of behavioral economics at Duke University and the author of Predictably Irrational and The Upside of Irrationality, noted this is a trade-off between enforcing ethics and the degree to which one would benefit by letting morally offensive behavior go unchecked.
ULTIMATUM GAME LESSONS
I can attest that, as a planner, I would have accepted the $2 million if I were Player 2. This demonstrates that, like every other human being on the planet, my ethics aren't absolute.
Financial planners have many conflicts of interests with their clients, such as:
* Telling a client to pay off a mortgage will usually decrease our income even though it's often a risk-free attractive return for them.
* We may keep cash earning 0.05% for a client when there are alternatives earning 10 to 20 times this amount elsewhere.
* We review a client's decision to take a defined benefit payment vs. an annuity over time even though we nearly always benefit more by telling a client to take the money now.
Before you start sending me hate mail, keep in mind that planners are no different than any other profession. There is an inherent conflict of interest any time money changes hands.
Take dentists, for example. In an interview on NPR, Ariely discussed a study comparing dentists' examination of X-rays for cavities. The study showed that dentists examining the same X-rays were likely to find cavities, but in different teeth from one another. Naturally, dentists benefit financially by filling cavities.
Not surprisingly, this did not endear Ariely to the dental community. Soon after, Ariely says, dentists were calling him and saying he was an idiot and didn't deserve to have a position as a professor.
Ariely notes: "I don't think that dentists are particularly evil, selfish or greedy, just that [much like the rest of us] when they face conflicts of interest they are likely to see the world in a distorted way. They are likely to look, and find, problems for which the treatments are more lucrative."
The only thing that surprised me about this study was how surprised people seemed to be with the results. Steven Levitt, a co-author of Freakonomics, found that real estate agents were likely to sell their own homes for a higher price than their clients' homes because they received a larger benefit. If you see a surgeon, her economic incentive is to operate. A lawyer benefits by telling you your case is good and you should sue.