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The author is grateful for comments from Ghiath Shabsigh, Lucyna Gornicka, Deniz Igan, and Prasad Ananthakrishnan. Karen Lee provided invaluable research assistance. Special thanks to Jay Chang and Lilit Makarayan for their relentless focus on excellence in production of the paper. All errors are my own.
World Bank (2015), p. 6, p. 11, and p. 25. See also European Commission (2013), p. 4: “[E]mpirically—and anecdotally—this assumption [of people acting rationally] does not hold. People sometimes make foolish decisions, which are ultimately not in their self-interest.”
Neurologist Antonio Damasio (partly countering Descartes) stresses that “somatic markers” (which can roughly be described as “gut feelings”) guide us when push comes to shove, and therefore limit the amount of options that we can actually choose from. In that sense, choosing is not an affair of simply the mind, but of subconscious aspects related to our other senses (Damasio, 1996, p. 173).
See, e.g., Hauser (2006), who refers to social psychologists Vandello and Cohen when stating that cultural patterns get internalized and are then hardly noted by people themselves, and even “if noted, rarely questioned; if questioned, rarely energetically refuted” (p.154). And similarly, Swaab (2010), referring to fMRI experiments, that show “that there are cortical areas that take seven to ten seconds in preparing a motoric action to prepare before this enters into our consciousness. Experimental interventions have been done to prove that the consciousness lags behind the initiation of the action…. The fact that much of our actions take place unconsciously, does not exclude that we can act consciously when we are drawn to attention” (pp. 385–87).
See the concept of “choice architecture,” as described in R. Thaler and C. Sunstein’s 2008 Nudge: Improving Decisions about Health, Wealth, and Happiness.”
At least, according to natural law lawyers (a positive law lawyer could argue that there is no law other than positive law—the law that exists at a given time). Though this paper does not to give an overview of legal philosophy, it is worth noting that Raz (1983) constructed the well-respected theory of “there is no general obligation to respect the law,” as such: “While it is never wrong not to respect the law it is morally wrong to respect it in South Africa [under the Apartheid regime, AK] or other fundamentally iniquitous regions” (pp. 258–59).
See also, e.g., Haidt’s Social Intuitionist Model of moral judgment, in Haidt, J., 2001, “The Emotional Dog and its Rational Tail: A Social Intuitionist Approach to Moral Judgment,” Psychological Review, Vol. 108, No. 4, pp. 814–34. Haidt states that moral judgment is predominantly based on automatic processes (which he calls “moral intuitions”) and not on conscious reasoning. Conscious reasoning only comes into play when humans want to find “evidence” for their moral intuitions.
Neurobiology relates to research of cells of the nervous system and the organization of these cells into functional circuits that process information and mediate behavior. It is a subdiscipline of both biology and neuroscience, and can wary from molecular to integrative aspects of the central nervous system. See, e.g., www.sciencedaily.com/terms/neurobiology.htm and https://medicine.yale.edu/neurobiology/.
It is not likely that the social and market norm contexts would overlap. Even in the case of the decision being at the outset in line with both a social norm (say, giving money to a friend in need) and a market norm (giving money to a friend in need with the idea that she will—even if not explicitly agreed—pay you back the same amount or even more later), the underlying rationale will be different.
See Kahneman’s so-called “System 1,” which he uses to describe thoughts that are fast, automatic, frequent, emotional, stereotypic, and subconscious. D. Kahneman (2011), Thinking, Fast and Slow, Farrar, Straus, and Giroux (New York). According to Immanuel Kant, individual introspection is not possible from a scientific point of view, because of lack of reference (and as such, only transcendental arguments are possible: situations in which the mind has no other option but to go about a certain way).
See, e.g., Giddens, A., 1984, The constitution of society: Outline of the theory of structuration (Cambridge: Polity Press).
See De Waal, F., 2013, The Bonobo and the Atheist (New York: W.W. Norton & Company, Inc.), who argues that morality is not limited to humans, but is part of nature in general (and therefore also clearly present in animals).
Hauser (2006), p. 105, gives a negative description: “Social norms are rules and standards that limit behavior in the absence of formal laws.”
Raz (1983), p. 245. Examples of these kind of social norms that have been transposed into legal norms are, e.g., prohibition of murder, rape, libel, invasion of privacy, breach of promises under certain conditions, certain kinds of deception.
Stout (2011), p. 6, randomly lists a number of synonyms, e.g., “virtuous, fair, honest, trustworthy, upright, faithful, thoughtful, loyal, selfless, conscientious, generous, caring, kind, agreeable, ethical, decent, praiseworthy, altruistic, humane, charitable, principled, cooperative, considerate, compassionate.”
Hauser (2006), p.131, in describing the Trolley problem, notes that “further, all those who have written on this topic are highly educated, brought up in a Western culture, and over thirty.”
One might argue that it is not a norm, but rather it “just makes the driver feel good.” That might be the case, but the “good feeling” is still an element of the realm of social norms. As we will see further on, the “feel good factor” might, e.g., be derived from seeing others exhibit this behavior or identifying oneself with somebody who you would think would exhibit this behavior.
The links between religion, culture, and economic development were already promoted in Max Weber’s famous work The Protestant Ethic and the Spirit of Capitalism (1905).
Who refers to, inter alia, La Porta, Lopez-de-Silanes, Shleifer, Visny (1999) and their use of religion as a proxy for culture in their study of government quality across counties; Stultz, Williamson (2003) and their research into the links be tween a country’s principal religion and the cross-sectional variation in creditor rights; Barro, McCleary (2003) and their research into the correlation between macroeconomic development and church attendance; Guiso, Sapienza, Zingales (2003) and their research into the links between religion and economic attitudes that are conducive to higher per capita income and growth; Iannaccone (1998). Hillary (2009), p. 457. See also Lopez-Claros, A., and V. Perotti, 2014, Does Culture Matter for Development? World Bank Policy Research Working Paper No. 7092.
The New York Times, 2014, “With ‘So Help Me God’ Ethics Oath, Dutch Banks Seek Redemption,” December 12, 2014.
C. Lagarde, 2015, The Role of Personal Accountability in Reforming Culture and Behavior in the Financial Services Industry, speech given at the New York Federal Reserve, November 5, 2015.
President Trump Executive Order 13772, February 3, 2017. According to the US Treasury: “The Administration is pursuing a wide range of coordinated strategies to stimulate growth, including tax reform, a new approach to managing international trade, and improvements to government accountability, including shrinking, where appropriate, the size and role of government. A more efficient system of financial regulation is a critical pillar of policies to stimulate economic growth,” in US Department of the Treasury, 2017, A Financial System That Creates Economic Opportunities.
EC (2013), p.10.
Braithwaite (1995), p. 314, referring to Sutton, A., R. Wild, 1978, “Corporate crime and social structure,” in Wilson, P.R., J. Braithwaite (editors), Two Faces of Deviance (Brisbane: University of Queensland Press).
Winter (2010), p. 460. McBarnet (2006), p. 2, in the aftermath of the 2001 Enron scandal, dubbed the behavior of senior Enron staff “creative compliance.” She referred to the extensive compliance with mostly very detailed, rule-based regulations, while simultaneously seeking loopholes between those rules. Anything that is not explicitly prohibited is implicitly allowed.
In Acemoglu and Jackson (2015), the authors make a distinction between law-abiding citizens and law- breaking citizens. The authors find that greater fines and better public enforcement both reduces the total number of law-breakers and increases compliance among law-abiding citizens. However, it also increases the level of law-breaking among law-breaking citizens.
A related discussion is that regarding “self-regulation.” Self-regulation can be defined as “allowing regulated parties deemed relatively trustworthy to conduct and report their own audits or inspections, subject to some risk of verification” (Sparrow 2000, p. 42, ref. Ayres and Braithwaite 1992—though arguably this definition holds a narrower compliance scope). Codes of conduct, oaths of allegiance or commitments, solemn statements—they all add an extra “appeal” to a statement that would in general already be considered of the person making the statement (a flag ceremony for new citizens does not imply that people born citizens have any less commitment to their country, nor does it imply (at least, not in most countries) that the new citizens would have any less commitment if they had not partaken in the ceremony). Raz (1983), p. 239: “such an oath may impose a moral obligation to obey (e.g., when voluntarily undertaken prior to assuming an office of state which one is under no compulsion or great pressure to assume). Most people, however, do not commit themselves in this way.”
See, e.g., De Vries (2013), who argues that “[i]n the past two decades, the trend in financial supervisory legislation was to replace detailed rules with more open ‘principles.’ After the crisis, principles-based regulation was seen as part of the problem and it seemed that is was carried to its grave.… The reality is less clear-cut, however. Financial supervisory legislation, as it stands today, remains a mix of detailed rules and open standards.”
Renamed and reorganized into the Prudential Regulatory Authority in 2013.
Smith, A., 1776, An Inquiry into the Nature and Causes of the Wealth of Nations, W. Strahan, T. Cadell (London).
Testimony by Alan Greenspan, US House Oversight and Government Reform Committee hearing, October 23, 2008, http://www.gpo.gov/fdsys/pkg/CHRG-110hhrg55764/html/CHRG-110hhrg55764.htm.
See Davis, J.H., F.D. Schoorman, L. Donaldson, 1997, “Toward a Stewardship Theory of Management,” The Academy of Management Review, Vol. 22, No. 1.
See Ariely (2010) and Ostrom (in Gintis [2005, p. 264]), referring to Frey and Benz (2001, pp.19–20) on economic incentives: “The economic incentive in itself changes the frame of the exchange relationship across treatments. Over and above the relative price effect they produce, incentives undermine part of the underlying intrinsic motivation by transforming a relational contract into a purely transactional contract (…) Individuals lower their intrinsic efforts in the dimensions where they have the leeway to do so, i.e., in those areas where they do not face the countervailing relative price effect provided by the incentive mechanism.”
“Crowding out” here refers to “an undermining effect of rewards and its definition extended to any effect that is opposite to the relative price effect of standard economic theory, whereby reduced costs should increase behavior, and increased costs should reduce it. The effect, therefore, includes cases where penalties increase behavior, and focuses on behavior concurrent with the incentive rather than after its removal.” (Promberger, 2013).
Shavell (2010), p. 20, makes a similar distinction in three determinants of compliance behavior: (1) the desire to do social good; (2) the possibility of legal sanctions; and (3) the possibility of social sanctions.
Ibid., p. 57.
Shavell (2010), p. 4. He also refers to expressions of disapproval, “such as scowling at a person who is seen littering in a park or dissociating oneself from a person who one learns has cheated on his taxes” (p. 22).
Kahneman, D., 2003, “Maps of Bounded Rationality: Psychology for Behavioral Economics,” American Economic Review, 93 (5): 1449–75.
Kahneman (1974), p. 1124.
See, for instance, Bayes’ theorem (named after Thomas Bayes, 1763), which expresses how a subjective degree of belief should rationally change to account for evidence.
Kahneman (1974), p. 1,125. Another interesting presentation is that of Hersh Shefrin on “BP’s failure to debias” in which he describes the need for behavioral corporate finance using the BP oil spill on the Deepwater Horizon as a case example. See, e.g., http://www.prmia.org/recorded-webinar/bps-failure-debias-underscoring-importance-behavioral-corporate-finance.
Kahneman (1974), p. 1,126.
See, e.g., Noreena Hertz’s TED talk (https://www.ted.com/talks/noreena_hertz_how_to_use_experts_and_when_not_to?language=en) on democratizing expertise, by means of not just considering opinions of CEOs and specialists, but also staff with practical experience, e.g., in the store, front office, or even on the street. Another example can be found in Dijkstra (2012): “Most decision makers in complex domains… have a lot of experience doing their job, but are often not aware of all relevant factors that should play a role in their decisions. Furthermore, they often cannot fully decompose their judgment or decision; their professional domains are just to[o] complex” (pp.132–33).
See, e.g., Kern, M.C., D. Chugh, 2009, “Bounded Ethicality: The Perils of Loss Framing,” Psychological Science, Vol. 20, No. 3.
See, for instance, Ostrom, E., Policies That Crowd out Reciprocity and Collective Action, in Gintis (2005), p. 253.
Shefrin (2002), pp. 13–42. In relation to financial risk management he divides the biases into three themes: (1) heuristic-driven themes (e.g., gambler’s fallacy, overconfidence, availability bias); (2) frame dependence (e.g., loss aversion, mental accounting, risk tolerance); and (3) inefficient markets (e.g., representativeness, loss aversion, overconfidence).
D. Kahneman, A. Tversky, 1979, Prospect Theory: An Analysis of Decision under Risk, Econometrica, 47(2), pp. 263–91.
Haldane (2014). Haldane highlights four biases that especially “may pose a particular [central bank] policy-making challenge, i.e., (1) preference bias, (2) myopia bias, (3) hubris, and (4) groupthink. (See subsection D, Role of Central Banks.)
See, for instance, Favaretto, F., and D. Masciandaro, 2016, Too Little, Too Late? Monetary Policymaking Inertia and Psychology: A Behavioral Model; and, Masciandaro, D., P. Profeta, and D. Romelli, 2016, Gender and Monetary Policymaking: Trends, Drivers and Effects.
DNB’s Expertise Center on Governance, Conduct, and Culture.
Leading by Example, p. 2.
WDR (2015), p. 2.
Feldman (2017), referring to Weisel, O., S. Shalvi, 2015, “The Collaborative Roots of Corruption,” Proceedings of the National Academy of Sciences, 112 (34), pp. 10651–56.
Feldman (2017), referring to the following studies:
- Lessig, L., 2011, Republic, lost (New York: Grand Central).
- Dana, J., G. Loewenstein, 2003, “A Social Science Perspective on Gifts to Physicians from Industry,” Jama, 290 (2), pp. 252–55.
- Veltrop, D., J. De Haan, 2014, “I Just Cannot Get You Out of My Head: Regulatory Capture of Financial Sector Supervisors,” DNB Working Paper, 410, January.
- Jones, D., 2000, “Group Nepotism and Human Kinship,” Current Anthropology, 41 (5), pp. 779–809.
- Kwak, J., 2013, “Cultural Capture and the Financial Crisis,” Preventing Regulatory Capture: Special Interest Influence and How to Limit It, pp. 71–98.
Toward Effective Governance of Financial Institutions, G30, April 2012, p. 15.
EU (2013), see most notably article 98, sub 7, outlining the need for supervisors to examine “corporate culture and values” in the so-called Supervisory Review and Evaluation Process (SREP).
European Commission (2013), p. 6. Interestingly, this report (footnote 7) indicates that the European Commission established a summer school in behavioral economics for EU policymakers in 2012 to create more awareness of their own biases.
MINDSPACE: influencing behavior through public policy. 2010. Available at: http://www.instituteforgovernment.org.uk/sites/default/files/publications/MINDSPACE.pdf. A more simplified version, dubbed “EAST: Easy, Attractive, Social, Timely,” has subsequently been published by the BIT in order to make the concepts underlying MINDSPACE more pragmatic for policymakers. See also: http://wwwbehaviouralinsights.co.uk/publications/east-four-simple-ways-to-apply-behavioural-insights/.
See New South Wales Department of Premier and Cabinet. http://bi.dpc.nsw.gov.au/, October 19, 2014.
Sparrow, p. 38.
Howard, P., 1994, The Death of Common Sense: How Law is Suffocating America, Random House (New York).
Sparrow, p. 4.
Thaler’s work on behavioral economics was recognized by the 2017 Nobel Committee, when it awarded the Nobel Prize for Economics to him.
IIF, pp. 5–6.
CRD IV, articles 86, 87, and 94.
EBA GL 44: para. B3m, 10.2 (“professional and responsible behavior”).
One way of moving through the hierarchy of interventions is that of the US FDIC Prompt Corrective Action mechanism. This mechanism gradually increases the amount of capital that an FDIC-supervised entity needs to hold.
“Lack of trust and confidence in the banking sector creates material costs to society. Fixing culture in banking is now a public trust—as well as an economic—imperative”; ibid.
According to Masciandaro (2016), p. 52, in monetary policy jargon, a “dove” is a policymaker who likes to implement active monetary policies, including inflationary ones; a “hawk” is a policymaker who dislikes them; and a “pigeon” falls in the middle.
Blinder (2016), p. 4.
Mark Carney, Governor of the Bank of England, noted that forward guidance requires that the public understands it: “People have much more important things to worry about than price and financial stability… What do citizens think the guidance is? People understand these messages when they are simple and out there and if it affects behaviour” (Financial Times, “Central bankers warn of limits to forward guidance,” November 14, 2017).
Blinder (2016), p. 9.
Ibid., p. 270.