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.
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).
- 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.
- 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.