SEATTLE - From athletes who abuse illegal substances in order to win to business executives who lie on financial statements to boost profitability, examples of cheating are all around.

But while the average person tends separate themselves from those egregious offenders, most individuals actually tell lies every day, Dan Ariely, professor of psychology and behavioral economics at Duke University, said at the Investment Management Consultants Association’s annual conference in Seattle.

As examples, Ariely asked the audience of about 1,600 financial advisors and investment professionals several questions: How many of you in the last week have eaten more than you think you should? How many of you in the last month have exercised less than you think you should? How many of you have ever texted while driving? For each question, many hands in the audience shot up.

“We are really much more like Homer Simpson than we think,” Ariely said. “On the one hand, we do all of these things, and on the other hand we have this view of ourselves of being in control of our decisions and making rational decisions. I think that’s the biggest irrationality of them all, is how unaware we are of our failures."

Beware the Slippery Slope

When Ariely met with one professional cyclist who took performance-enhancing drugs, the cyclist said it started when he noticed his results were staying the same while the rest of his teammates were improving.

Then, one friend gave the cyclist the name of a physician, who gave him a prescription.

“The first time he took it it was different, and it was just the injection and nothing else and it felt a bit strange,” Ariely said of the athlete, who then worked the drug into his daily regimen of vitamins. “After this first time, it just became standard.”

After the athlete became accustomed to using the drug, he helped his other athlete friends get it and even imported it from China. 

“The first act is probably the most dangerous,” Ariely said. “People take one act and then they rationalize it.”

Take Bernard Madoff as an example. Had he planned at the outset to commit a massive financial fraud, he could have hatched a better plan, Ariely said. The fact that he did not shows that his scheme likely began with one misstep.

“If you started with a plan to steal $40 billion, wouldn’t you have an island somewhere and a plane and an exit strategy?” Ariely said. “The fact that he is in prison and his son committed suicide suggests that he did not think about the long term action.”

Raising the Bar

Learning from mistakes that have made headlines like Madoff’s is especially important now, Ariely said, as the financial services industry faces a “crisis of trust.”

To repair that, financial advisors need to move past vague general principles and adhere to stricter standards.

“Saying something like, ‘Do well by your clients.’ It’s so general that it’s unclear what it means,” Ariely said. “The rules that help us are rules that help us figure out are we on the right side or the left side.”

Alcoholics Anonymous, for example, has a strict no drinking rule. But if the rule was half a drink a day, Ariely said, “the glasses would become very big.” Like that program, financial advisors also need to set clear guidelines with clients about the services they will provide, he said, and they need to update that agreement annually.

“Having something that is not a formal contract, but is a social agreement about the values of behavior is crucial,” Ariely said.

Financial advisors can also differentiate themselves by placing less emphasis on portfolio optimization, and instead focus on what clients are spending and what they are wasting. Helping clients better allocate their funds can not only result in greater returns, according to Ariely, but also a greater sense of security.

“Getting into that would create higher trust, higher involvement and provide more benefits,” Ariely said.


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