Why do smart people do stupid nasty things?

You’ll find a great interview with Nobel-Prize-winning economist Daniel Kahneman in today’s Freakonomics blog.  Kahneman’s contribution (along with Amos Twersky) to behavioral economics addresses the question I so often ask: How could _______ be so stupid?

For example, for all of his sickness, how could Jerry Sandusky do something so stupid?  He must have realized that if he were ever caught, his useful life would end.  Likewise, why didn’t Joe Paterno do anything about it?

Here is an excerpt from Freakonomics’ interview with Dr. Kahneman:

Q.As you found, humans will take huge, irrational risks to avoid taking a loss. Couldn’t that explain why so many Penn State administrators took the huge risk of not disclosing a sexual assault? -Tim
A.In such a case, the loss associated with bringing the scandal into the open now is large, immediate and easy to imagine, whereas the disastrous consequences of procrastination are both vague and delayed. This is probably how many cover-up attempts begin. If people were certain that cover-ups would have very bad personal consequences (as happened in this case), we may see fewer cover-ups in future. From that point of view, the decisive reaction of the board of the University is likely to have beneficial consequences down the road.

Translation:

Coach Paterno just found out that Sandusky molests children.  Here is his choice.  He can either (1) report and then fire Sandusky or (2) put off action until a later time (procrastination).

  1. The immediate consequences of reporting and firing Sandusky will be huge.  A tremendous scandal will break out, and possibly more victims will make accusations against Sandusky and the Penn State program.  
  2. Procrastination might appear to be a less painful solution because it will temporarily avoid the scandals and accusations, maybe even “buying time” until an easier solution can be found. 
The error here is that procrastination itself will probably increase the magnitude of the scandal and controversy.  If Paterno had acted immediately, he would probably not have been fired.  He probably got fired for procrastinating.
We’re seeing a new scandal emerge today over at Syracuse U.  (Disclosure: I’m a long-time fan of Longhorn Basketball, and have an ax to grind against Syracuse.)  ESPN and the police have known about this one for eight years! They have a lot of explaining to do.  But what would Dr. Kahneman say about ESPN?
ESPN had to choose between (1) releasing the tape to the public, and (2) delay.    For some reason (that I can’t fathom) ESPN executives perceived great costs to releasing the scandalous tapes, so great that it was easier for them to procrastinate.

This obviously has many parallels to the accounting profession.  Unfortunately, many accountants and executives have chosen to procrastinate and perpetuate frauds, rather than reveal them.  Dr. Kahneman’s research shows that, when confronted with this choice, many people can’t accurately measure the risks.

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About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

4 comments

  1. In the accounting profession I think smart people do stupid things for a few reasons: greed, they are worried about losing their job, and/or they think they won't get caught. Most of the recent accounting scandals that involved the upper management of companies only have one explanation as to why. It is the simple fact that an opportunity to make a little more money presented itself and they took that opportunity. Coupled with the opportunity, most of upper management believes that they can't be caught because they have access to the entire company's books and can manipulate them so as not to get caught. The problem they don't see is that every year or quarter they will have to manipulate numbers to keep the fraud hidden. Other people make stupid decisions because they are afraid that if they don't do what their bosses tell them, they will be fired. This is part of what happened with MCI. One person that was involved knew what they were doing was wrong, but did it anyway because she didn't want to lose her job.Overall, smart people make dumb choices because they never talked about ethics with Professor Holtzman.

  2. I agree with Erik for the most part, but I think there may actually be another side to it which may even categorize some things as a mental illness. When you look at someone like a Bernie Madoff or anyone that would be willing to have the arrogance to think they can get away with anything remotely close to that, I think there has to be some kind of mental issue going on. A lot of people want to be able to prove that they can do something just because they think they can. I know some computer hackers challenge themselves to hack into certain websites just to show off that they can do it. They might not have nay intent to harm the network they are gaining access to, and they don't stand to gain anything besides some internet notoriety and yest they risk getting arrested if they are caught. Some people enjoy the challenge, some people enjoy the excitement. They have the arrogance to believe they can get away with anything and once they have the ability, they go for it. I am willing to bet that most psychiatrists would find a similar diagnosis for those types of people.

  3. In the accounting field, there have been many scenarios where smart people have done stupid things. There are many reasons people commit such acts. Some people who get a taste of power like to see how far that power can take them, in other words to what degree they can abuse this power. If someone has access to certain things, maybe they will feel as if they can manipulate records and commit fraud without getting caught. People in higher places may think they will not be questioned by people in lower places out of fear or that they will be able to brush off the discrepancies with reasoning that may not even make sense. It seems that these people are not thinking about the greater scheme of things, i.e what would happen to them or their families if caught. All they think about is that moment and what it would be like to have the extra money and how much easier it would be to take, then to work for it. These people tend to be narcisistic, selfish and irrational with no conscious and extreme lack of respect for their employers, themselves, and the people who would be affected in the long run by their actions.

  4. I think the main reason why smart people do stupid things is because they truly believe that they will get away with it. It seems like a common trait in a lot of the fraud cases that I examined in my Forensic Accounting class this past summer is the arrogant/ narcissistic attitudes of many of these fraudsters. The are able to rationalize everything with the pure fact that they are smart, therefore they must be able to get away with it. It also appears that after a some time, they feel that they haven’t gotten caught and that they will continue to get away with it, so they continue to push their boundaries. In this same class, we explored the possibility that a great deal of the time the fraud would have not been found if the fraudster had stopped early on. But because these individuals have gotten away unscratched so far, they continue to steal, lie, cheat, whatever, because they are overly confident and their greed gets the best of them.

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