The (Honest) Truth About Dishonesty

DISGUISED FAVORS ARE one thing, but there are many cases when conflicts of interest are more easily recognizable. Sometimes a drug maker pays a doctor thousands of dollars in consulting fees. Sometimes the company donates a building or gives an endowment to a medical researcher’s department in the hope of influencing his views. This type of action creates immense conflicts of interest—especially at medical schools, where pharmaceutical bias can be passed from the medical professor to medical students and along to patients.

Duff Wilson, a reporter for The New York Times, described one example of this type of behavior. A few years ago, a Harvard Medical School student noticed that his pharmacology professor was promoting the benefits of cholesterol drugs and downplaying their side effects. When the student did some googling, he discovered that the professor was on the payroll of ten drug companies, five of which made cholesterol drugs. And the professor wasn’t alone. As Wilson put it, “Under the school’s disclosure rules, about 1,600 of 8,900 professors and lecturers at Harvard Medical School have reported to the dean that they or a family member had a financial interest in a business related to their teaching, research, or clinical care.”² When professors publicly pass drug recommendations off as academic knowledge, we have a serious problem.

Fudging the Numbers

If you think that the world of medicine is rife with conflicts of interest, let’s consider another profession in which these conflicts may be even more widespread. Yes, I’m talking about the wonderland of financial services.

Say it’s 2007, and you’ve just accepted a fantastic banking job on Wall Street. Your bonus could be in the neighborhood of $5 million a year, but only if you view mortgage-backed securities (or some other new financial instrument) in a positive light. You’re being paid a lot of money to maintain a distorted view of reality, but you don’t notice the tricks that your big bonus plays on your perception of reality. Instead, you are quickly convinced that mortgage-backed securities are every bit as solid as you want to believe they are.

Once you’ve accepted that mortgage-backed securities are the wave of the future, you’re at least partially blind to their risks. On top of that, it’s notoriously hard to evaluate how much securities are really worth. As you sit there with your large and complex Excel spreadsheet full of parameters and equations, you try to figure out the real value of the securities. You change one of the discount parameters from 0.934 to 0.936, and right off the bat you see how the value of the securities jumps up. You continue to play around with the numbers, searching for parameters that provide the best representation of “reality,” but with one eye you also see the consequences of your parameter choices for your personal financial future. You continue to play with the numbers for a while longer, until you are convinced that the numbers truly represent the ideal way to evaluate mortgage-backed securities. You don’t feel bad because you are certain that you have done your best to represent the values of the securities as objectively as possible.

Moreover, you aren’t dealing with real cash; you are only playing with numbers that are many steps removed from cash. Their abstractness allows you to view your actions more as a game, and not as something that actually affects people’s homes, livelihoods, and retirement accounts. You are also not alone. You realize that the smart financial engineers in the offices next to yours are behaving more or less the same way as you and when you compare your evaluations to theirs, you realize that a few of your coworkers have chosen even more extreme values than yours. Believing that you are a rational creature, and believing that the market is always correct, you are even more inclined to accept what you’re doing—and what everyone else is doing (we’ll learn more about this in chapter 8)—as the right way to go. Right?

Of course, none of this is actually okay (remember the financial crisis of 2008?), but given the amount of money involved, it feels natural to fudge things a bit. And it’s perfectly human to behave this way. Your actions are highly problematic, but you don’t see them as such. After all, your conflicts of interest are supported by the facts that you’re not dealing with real money; that the financial instruments are mind-bogglingly complex; and that every one of your colleagues is doing the same thing.