Speaker 1: Professor. I bike to work every day and I often
Speaker 1: blow through stop signs. This episode is brought to you
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Speaker 1: for all investors. Hi, and welcome back to Bloomberg Benchmark
Speaker 1: Up podcast about the global economy. It is Wednesday, December three.
Speaker 1: I'm Tori Stiwell, an economics reporter with Bloomberg News in
Speaker 1: d C. And I am joined by my co host Akdo,
Speaker 1: our editor for Benchmark in San Francisco. Hey, Tory, how's
Speaker 1: it going pretty good? This weather that we're having is
Speaker 1: crazy heading into the holidays. I know we've been getting
Speaker 1: a lot of rain here in California, which is kind
Speaker 1: of nuts. It's like, what is this thing falling out
Speaker 1: of the sky. Nowhere carries umbrellas anymore? What are you
Speaker 1: doing for Christmas? I am going home to North Carolina,
Speaker 1: so we'll see the fam very nice. I'm going skiing
Speaker 1: in Tahoe, which is why I've been obsessed about this rain.
Speaker 1: If it's raining here, it's snowing in Tahoe. So that's
Speaker 1: a good thing. Yeah. So, as we're nearing the end
Speaker 1: of and I was reflecting back on the news of
Speaker 1: the year, I couldn't help but realized just how much
Speaker 1: cheating went on. You know, we had the Volkswagen diesel scandal.
Speaker 1: Goldman Sacks and JP Morgan both had to fire analysts
Speaker 1: for cheating on internal training tests. There's this former trader
Speaker 1: for Ubs and City Group. He was sent us over
Speaker 1: a decade of prison time after he was found guilty
Speaker 1: of rigging library. There was deflate Gate. How could we
Speaker 1: forget deflate Gate? And most recent and most recently, there's
Speaker 1: Martin Screlly, the price gouging Parma exec who was charged
Speaker 1: with securities fraud this month. Right, So we wanted to
Speaker 1: use today's show to you know, talk about the economics
Speaker 1: behind cheating. Um, not just those big examples that Tori
Speaker 1: you just gave, but also little incidents of cheating, to
Speaker 1: like when I don't follow the regular traffic laws of
Speaker 1: San Francisco when I'm on my bike, because otherwise, you know,
Speaker 1: if cheating wasn't this prevalent, we wouldn't need meter maids,
Speaker 1: we wouldn't need judges, we wouldn't need an umpire at
Speaker 1: a recreational softball game, or the little scanner things at
Speaker 1: the doors of the stores that bleep when you try
Speaker 1: to wake walk off with something you didn't pay for
Speaker 1: just generally get very close to them in my experience.
Speaker 1: Oh yeah, I hate those things. But it's it's that
Speaker 1: level of ubiquity document that you just mentioned that makes
Speaker 1: it almost possible to calculate how much cheating costs our society,
Speaker 1: which is what I first set out to do when
Speaker 1: I got to thinking about this topic. You know, how
Speaker 1: much this cheating cost. It is not really easy to
Speaker 1: come up with that figure. So instead we want to
Speaker 1: talk about why people cheat in the first place, from
Speaker 1: an economic standpoint, because sometimes there is a case to
Speaker 1: be made in favor of cheating. Also, why do society
Speaker 1: is discourage cheating? And how does globalization mean that it's
Speaker 1: going to get a lot harder to police cheating in
Speaker 1: our world? And for that we're bringing on Robert Stonebreaker
Speaker 1: and economics professor at Winthrop University in rock Hill, South Carolina.
Speaker 1: Hello professor, Hello, Hey, thanks so much for joining us. Professor.
Speaker 1: Let's walk through the act of cheating from an economic standpoint,
Speaker 1: because I think a lot of people out there are
Speaker 1: prone to think of cheating as sometimes being this knee
Speaker 1: jerk decision, something you do without thinking about it. But
Speaker 1: it's often a lot more rational than that. Right. Yes,
Speaker 1: economists would argue that our decisions are always made on
Speaker 1: the basis of our perceived costs and benefits of those decisions. Uh.
Speaker 1: For example, if I'm watching TV, I must have thought
Speaker 1: the benefit of watching TV exceeded the cost of watching TV.
Speaker 1: And it's the same thing for cheating. People understand that
Speaker 1: there are potential benefits of cheating, they understand their potential
Speaker 1: costs of cheating. But if they think that those benefits
Speaker 1: are going to be greater than the costs, it is
Speaker 1: rational for them to cheat. So we make our choices
Speaker 1: about cheating. It's just like we make our choices about
Speaker 1: anything else. We ask ourselves what are the benefits, what
Speaker 1: are the costs? If we think cheating is more beneficial
Speaker 1: than costly, we cheat. In my economics classes, we often
Speaker 1: talked about cheating in the context of game theory. You know,
Speaker 1: we talked about cartels and collusion, etcetera. Can you walk
Speaker 1: us through exactly what game theory is and how cheating
Speaker 1: would fit into that concept. Sure, game theory is just
Speaker 1: uh theory designed to predict strategic behavior. So when we
Speaker 1: talk about game theory, we're not talking about playing monopoly
Speaker 1: or shoots and ladders. We're talking about strategic games. How
Speaker 1: do we react to other people in strategic situations. One
Speaker 1: of the things that crops up quite a bit in
Speaker 1: game theory is the idea that it is sometimes very
Speaker 1: difficult for individuals to make cooperative agreements. For example, suppose
Speaker 1: two countries decide to try to limit a military arms race.
Speaker 1: The difficulty is there's an incentive for both countries to cheat.
Speaker 1: For example, if my country thinks the other country is
Speaker 1: going to cheat, then I have to cheat too, because
Speaker 1: you're going to cheat and I don't, I'm gonna lose.
Speaker 1: So if I think you're going to cheat, my best
Speaker 1: choice is also to cheat. But it turns out that
Speaker 1: if I think you're not going to cheat, it's still
Speaker 1: true that my best choice is to cheat, because if
Speaker 1: you don't cheat, and I do. I win. So cheating
Speaker 1: in that situation becomes what economists would call a dominant strategy.
Speaker 1: If I think you're gonna cheat, I'm going to cheat.
Speaker 1: If I think you're not going to cheat, I'm going
Speaker 1: to cheat. No matter what I think you're going to do.
Speaker 1: My best strategy is to cheat, and of course your
Speaker 1: best strategy is also to cheat, because if you think
Speaker 1: I'm going to cheat, you'll cheat. If you think I'm
Speaker 1: not going to cheat, you can cheat and win. So
Speaker 1: we both have a dominant strategy to cheat, and we
Speaker 1: end up cheating each other and we get into a
Speaker 1: what's sometimes called up a prisoner's dilemma from a game
Speaker 1: theory perspective. But it's very difficult for us not to
Speaker 1: cheat in those cases. Can we walk through maybe a
Speaker 1: smaller example of cheating? So, Professor, I bike to work
Speaker 1: every day and I often blow through stop signs. Oh
Speaker 1: it's illegal. I'm pretty terrible, and I get yelled at
Speaker 1: all the time. But can you walk us through what's
Speaker 1: going on in my head in terms of the perceived
Speaker 1: costs and benefits of that decision. You're asking yourself first,
Speaker 1: what are the benefits of blowing through that soft sign.
Speaker 1: The work earlier I can, I don't have to sit
Speaker 1: and wait, and what are the costs? And the question
Speaker 1: is is there a police officer sitting beside you. I'm
Speaker 1: also thinking about the probability of getting caught exactly, in
Speaker 1: other words, convinced that one it's not likely that you
Speaker 1: will be caught, or two that even if you are caught,
Speaker 1: the penalty will be basically nothing and go through. In
Speaker 1: other words, there are two aspects of the cost. One
Speaker 1: is what's the probability that you will be caught, and
Speaker 1: two is what will the penalty be if you are caught,
Speaker 1: And you need both of those. If I'm sure I'm
Speaker 1: not going to get caught, I don't care what the
Speaker 1: penalty is, it won't matter. And if the penalty is minimal,
Speaker 1: I don't care if I'm caught because the penalty won't
Speaker 1: matter anyway. So you need both probability of being caught
Speaker 1: and you need a penalty. That makes a lot of
Speaker 1: sense to me because I have not been caught yet
Speaker 1: in my four years in San Francisco advertising this, but
Speaker 1: maybe the next time. Let's let's talk about an example
Speaker 1: from the business world. Volkswagen So for the last three
Speaker 1: months or so, they've been dealing with the fallout from
Speaker 1: a pollution cheating scandal. Um the company's diesel cars weren't
Speaker 1: passing the strict emission standards in the US, so they
Speaker 1: devised a cheat that eventually made its way into about
Speaker 1: eleven million vehicles, and now they're facing roughly seven point
Speaker 1: five billion dollars in diesel recall costs, not including fines
Speaker 1: and potential damages from hundreds of lawsuits, and they've also
Speaker 1: lost consumer trust. Their sales are falling, and they've been
Speaker 1: slow to recall the vehicles. One analyst put the total
Speaker 1: financial burden of the scandal at as much as twenty
Speaker 1: two billions. So, Professor Stonebreaker, you're telling me that someone
Speaker 1: at Volkswagen thought about all of these things and was like, yeah,
Speaker 1: let's do it. Since well, they did. The problem was
Speaker 1: they misestimated the likelihood that they would be caught. We
Speaker 1: certainly make mistakes, and what happened at Volkswagen, I presume,
Speaker 1: is that the people making those choices were convinced that
Speaker 1: they would not be caught. And indeed it took many,
Speaker 1: many years before they were caught, and it was almost
Speaker 1: an accidental uh case in which they were caught. So
Speaker 1: in that case, I'm sure that the Volkswagen people made
Speaker 1: a rational choice, But our rational choices don't always turn
Speaker 1: out the way we think. All of us have made
Speaker 1: choices that we were absolutely convinced we're going to be
Speaker 1: the right choices, only to find out later whoops. You know,
Speaker 1: I misestimated this probability, I misestimated this cost, And I'm
Speaker 1: sure that's what happened to Volkswagen. Yeah, it happens to
Speaker 1: me when I eat like pizza late at night. Well,
Speaker 1: we're going to take a quick break for a word
Speaker 1: from our sponsor, but when we come back, we will
Speaker 1: walk through how societies can stop cheating and the possibility
Speaker 1: that it might be getting more prevalent as we become
Speaker 1: an increasingly global society. When we come back, what do
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Speaker 1: may not be appropriate for all investors. Okay, so now
Speaker 1: we know about this economic framework behind whether we decide
Speaker 1: to cheat or not to cheat. Um, So let's talk
Speaker 1: about why societies try to stop it and how they
Speaker 1: can do that, um, professor, what's so wrong with cheating
Speaker 1: if it's the rational thing to do. The problem is
Speaker 1: that what is rational for the individual making the choice
Speaker 1: is not necessarily rational for the larger group. When one
Speaker 1: person cheats, they impose costs on others. For example, if
Speaker 1: I cheat on my taxes, surely I would never do that.
Speaker 1: But if somebody does their taxes, that may be perfectly
Speaker 1: rational from their perspective, but they're imposing costs on all
Speaker 1: other taxpayers. Other taxpayers either going to have to pay
Speaker 1: more or else people are going to lose benefits from
Speaker 1: the programs that their taxes could have supported. So my
Speaker 1: decision to cheat imposes costs on other people, and I
Speaker 1: might find to me there's a sort of a benefit
Speaker 1: of five from cheating, but maybe I impose costs of
Speaker 1: thirty five on other people. So my benefit of five
Speaker 1: certainly doesn't offset the thirty five costs to others. And
Speaker 1: that happens in all kinds of situations. If students cheat
Speaker 1: on exams, which is something I deal with on a
Speaker 1: day to day basis as a teacher, they impose costs
Speaker 1: on other people the ones that don't cheat, and in fact,
Speaker 1: in education, online education online courses have this problem. Normally,
Speaker 1: if you have a degree, a college degree, its signals
Speaker 1: employers that you have certain qualities. But many people look
Speaker 1: at online degrees as being less valuable signals because it's
Speaker 1: difficult to know whether or not students cheated in those
Speaker 1: online exams. And a classroom, I can monitor what's going on,
Speaker 1: you know, peop all out of textbook or talk to
Speaker 1: a classmate. I can see that, But many times when
Speaker 1: people take online exams, it is difficult to monitor whether
Speaker 1: or not they are in fact answering the questions, whether
Speaker 1: they're even the ones answering the questions, or whether they're
Speaker 1: using other kinds of sources to help them answer the questions,
Speaker 1: and employers understand that, and employers sometimes look at online
Speaker 1: degrees as being less valuable signals. In other words, is
Speaker 1: some cheat, it destroys the value of that signal for
Speaker 1: those who don't cheat. That's a really good perspective. I mean, so,
Speaker 1: we we know now why societies are trying to curb cheating.
Speaker 1: But is there a point at which the cost of
Speaker 1: trying to prevent this cheating outweighs the benefits of successfully
Speaker 1: doing so. Oh? Sure, it's like anything else. You want
Speaker 1: to do it only if the benefit covers the cost.
Speaker 1: If you look, for example, briefly that crime prevention h
Speaker 1: I could stop everybody in America from speeding, or I
Speaker 1: could stop everybody in America from blowing through a stop sign.
Speaker 1: All I have to do is station a police officer
Speaker 1: every twenty feet along every road. But the cost of
Speaker 1: doing so would be enormous compared to the benefit. Cann't
Speaker 1: be the same thing with cheating. I can stop people
Speaker 1: from cheating if I spend enough time and energy on
Speaker 1: monitoring what they do. But at some time, the cost
Speaker 1: of monitoring people just exceeds the benefit, and you find
Speaker 1: that in the workplace. My guess is that you've all
Speaker 1: seen people in a workplace who don't work as hard
Speaker 1: as they possibly could. At Bloomberg, no way, not possible.
Speaker 1: But if we monitored every employee, we could do something
Speaker 1: about that. You imagine you had a supervisor hanging over
Speaker 1: your shoulder every minute of every day. We probably wouldn't
Speaker 1: goof off as much as we otherwise would. But the
Speaker 1: cost of doing that would be enormous. It would be counterproductive.
Speaker 1: So we only want to cure a problem if the
Speaker 1: benefit of curing that problem is going to exceed the
Speaker 1: cost of curing that problem. You know, I kind of
Speaker 1: feel like I hear about cheating a lot more these days.
Speaker 1: And you know, maybe it's because I work in, you know,
Speaker 1: the news industry and we talked about this a lot.
Speaker 1: But you know, for example, you just talked about online schools. Um.
Speaker 1: I feel like it's gotten easier to cheat thanks to
Speaker 1: the Internet. So do you think it's the case that
Speaker 1: we're becoming more immoral or um? Why do you think
Speaker 1: cheating is becoming seems to be becoming more prolific these days.
Speaker 1: I'm hesitant to say we're less moral than we were
Speaker 1: in the past. I think immorality has been a problem
Speaker 1: since there's been humanities. I think it's a matter of
Speaker 1: changing costs and benefits. I think you can identify some
Speaker 1: cases in which it is more beneficial and or less
Speaker 1: costly to cheat today than it would have been in
Speaker 1: the distant past. First, it's a matter of what economists
Speaker 1: would call is are people involved in what they would
Speaker 1: call a one shot game or repeated game. If I
Speaker 1: go back to the game theory piece for a minute,
Speaker 1: If I'm going to interact with you one time and
Speaker 1: one time only, that's a different world that if I'm
Speaker 1: going to have to interact with you over and over
Speaker 1: and over again. If I'm a sort of the proverbial
Speaker 1: traveling salesperson, you know, I walk into a town, I
Speaker 1: con the people in that town out of money, and
Speaker 1: I leave. I get away with it. But if I'm
Speaker 1: going to try to do business there with the same
Speaker 1: people day after day, week after week, month after month,
Speaker 1: if I cheat them today, They're going to retaliate and
Speaker 1: get back at me the next time I interact with
Speaker 1: them rightly customers after So the more often I have
Speaker 1: to interact with you, the less likely it is I'm
Speaker 1: going to want to cheat you this time, because if
Speaker 1: I cheat today, say you'll retaliate and get back at
Speaker 1: me the next time. So one of the issues is
Speaker 1: are we interacting with people more or less than we
Speaker 1: did in the past. If you think it's sort of
Speaker 1: a proverbial small town American where everybody knows what everybody
Speaker 1: else does, the likelihood that I'm going to be caught
Speaker 1: cheating is high, and the likelihood that word of mouth
Speaker 1: will tell everybody in town that I cheated is high,
Speaker 1: and that will make it very difficult for me to
Speaker 1: interact with people in the future. That imposes a real
Speaker 1: cost on me of cheating. But suppose you look at
Speaker 1: a world in which you're interacting with different people every day.
Speaker 1: Suppose I'm living not in a small town, but I'm
Speaker 1: living in the middle of New York City. I could
Speaker 1: cheat you today and maybe never interact with you again
Speaker 1: for the rest of my life. So the more sort
Speaker 1: of transient we become, the less we interact with the
Speaker 1: same people over and over again, the more likely it
Speaker 1: is we can get away with cheating. That's really interesting.
Speaker 1: And also, like I guess, from a global standpoint and
Speaker 1: from a company standpoint, when we're thinking about businesses cheating.
Speaker 1: I feel like the globalization of commerce has got to
Speaker 1: impact the cost benefit that these companies undergo when they're
Speaker 1: deciding to cheat. Yeah, I think that's true of one
Speaker 1: of the things that the companies worry about. And if
Speaker 1: I get away from the small town analogy where word
Speaker 1: of mouth tells people who cheats and who doesn't cheat. Uh,
Speaker 1: how do you know if a firm you've never dealt
Speaker 1: with before is reliable? How do you know if a
Speaker 1: product you've never used before is a good product. How
Speaker 1: do you know if a restaurant you've never eaten in
Speaker 1: before is a good restaurant. Do you look at online reviews? Definitely?
Speaker 1: But do people cheat on online reviews? This is a problem.
Speaker 1: If we don't interact with these groups on an ongoing basis,
Speaker 1: it's difficult for us to know if these companies are
Speaker 1: trustworthy or not. The best we can do is to
Speaker 1: look at things like online reviews, But even though we
Speaker 1: find out are not always reliable. I think there have
Speaker 1: been studies which have shown that companies pay people to
Speaker 1: give them good online reviews and pay people to give
Speaker 1: their competitors bad online reviews. So the more difficult it
Speaker 1: is for us to know whether people are trustworthy or not,
Speaker 1: the easier it is to cheat, I would say, also,
Speaker 1: the stakes are higher too for these companies. It was
Speaker 1: the other thing I was going to suggest, the stakes
Speaker 1: are much larger in a globalized world. If I cheat
Speaker 1: and win customers in a local market, that's nice. But today,
Speaker 1: if I cheat, I can win not just the local market,
Speaker 1: I can win a global market. And I'm talking again
Speaker 1: about millions, billions of extra dollars as potential benefits. The
Speaker 1: larger the market, it's the bigger the stakes, the larger
Speaker 1: the market, it's the biggest potential games from cheating. Well,
Speaker 1: this is this is all great fodder for me, especially
Speaker 1: as we as we head into the holidays when I'm
Speaker 1: probably going to cheat on my plans to eat healthily.
Speaker 1: But thank you so much, Professor Stonebreaker for joining us.
Speaker 1: I really appreciate it, and I hope you had fun.
Speaker 1: Oh I did. Thank you. I enjoyed it, and thanks
Speaker 1: to you all for listening to Bloomberg Benchmark. We will
Speaker 1: be back next week, and until then you can find
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Speaker 1: well as on iTunes. Pocketcast, Stitcher, Google Play, et cetera.
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