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Why Be Honest If Honesty Doesn’t Pay
by Amar Bhide and Howard H. Stevenson
From the Magazine (September–October 1990)
We bet on the rational case for trust. Economists, ethicists, and business sages had persuaded us that honesty is the best policy, but their evidence seemed weak. Through extensive interviews we hoped to find data that would support their theories and thus, perhaps, encourage higher standards of business behavior.
To our surprise, our pet theories failed to stand up. Treachery, we found, can pay. There is no compelling economic reason to tell the truth or keep one’s word—punishment for the treacherous in the real world is neither swift nor sure.
Honesty is, in fact, primarily a moral choice. Businesspeople do tell themselves that, in the long run, they will do well by doing good. But there is little factual or logical basis for this conviction. Without values, without a basic preference for right over wrong, trust based on such self-delusion would crumble in the face of temptation.
Most of us choose virtue because we want to believe in ourselves and have others respect and believe in us. When push comes to shove, hard-headed businessfolk usually ignore (or fudge) their dollars-and-cents calculations in order to keep their word.
And for this, we should be happy. We can be proud of a system in which people are honest because they want to be, not because they have to be. Materially, too, trust based on morality provides great advantages. It allows us to join in great and exciting enterprises that we could never undertake if we relied on economic incentives alone.
Economists and game theorists tell us that trust is enforced in the marketplace through retaliation and reputation. If you violate a trust, your victim is apt to seek revenge and others are likely to stop doing business with you, at least under favorable terms. A man or woman with a reputation for fair dealing will prosper. Therefore, profit maximizers are honest.
This sounds plausible enough until you look for concrete examples. Cases that apparently demonstrate the awful consequences of abusing trust turn out to be few and weak, while evidence that treachery can pay seems compelling.
The moralists’ standard tale recounts how E.F. Hutton was brought down by its check-kiting fraud.1 Hutton, once the second largest broker in the nation, never recovered from the blow to its reputation and finances and was forced to sell out to Shearson.
Exxon’s Valdez disaster is another celebrated example. Exxon and seven other oil companies persuaded the town of Valdez to accept a tanker terminal by claiming that a major spill was “highly unlikely.” Their 1,800-page contingency plan ensured that any spill would be controlled within hours. In fact, when Exxon’s supertanker spewed forth over 240,000 barrels of oil, the equipment promised in the cleanup plan was not available. The cost? According to recent (and still rising) estimates, Exxon’s costs could exceed $2 billion, and the industry faces severe restrictions on its operations in Alaska.
But what do these fables prove? Check-kiting was only one manifestation of the widespread mismanagement that plagued Hutton and ultimately caused its demise. Incompetently run companies going under is not news. Exxon’s underpreparedness was expensive, but many decisions turn out badly. Considering the low probability of a spill, was skimping on the promised cleanup equipment really a bad business decision at the time it was taken?
More damaging to the moralists’ position is the wealth of evidence against trust. Compared with the few ambiguous tales of treachery punished, we can find numerous stories in which deceit was unquestionably rewarded.