From Business Week-A Little on the Psychology of Cheating

When People Reckon It's O.K. to Cheat
Perhaps because of the cheating uncovered in the aftermath of the financial crisis—the lies told by everyone from mortgage lenders to Bernie Madoff—behavioral economist Dan Ariely has been getting a lot of calls about the nature of dishonesty. Ariely, a Duke University professor and author of the best-selling book Predictably Irrational, has spent years studying the topic.

Ariely says he's not surprised that derivatives—whose values are based on other financial assets—have gotten a bad rap. He has found that people are more likely to cheat if they are a step removed from the cash payoff. In one experiment, he paid subjects (whom he allowed to report their own scores) for correctly solving math problems—some in cash, some in tokens to be redeemed across the room. The second group exaggerated their scores twice as much as the first. Similarly, in studies of real-life expense reports, he found managers pad expenses more when their assistants compile the report. Such detachment, Ariely says, may be what's involved "when you backdate a stock option."

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