Motley Fool Hidden Gems Investing - Motley Fool Money: 06.15.2012

Episode Date: June 15, 2012

Investors brace for elections in Greece.  JPMorgan Chase CEO Jamie Dimon testifies before Congress.  Dell and Nokia announce some big cuts.   And Microsoft makes a big buy.  Our analysts discuss those stories and share three stocks on their radar.  Plus, we talk about the business of lying with Dan Areily, author of The Honest Truth About Dishonesty:  How We Lie to Everyone - Especially Ourselves. Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill, and joining me in studio this week from Motley Fool Inside Value, Joe Mager, for Motley Fool income investor James Early and for Million Dollar Portfolio, Ron Gross. Gentlemen, good to see you. And good to see you, Chris. We've got the latest on Dell, Nokia, Microsoft, and more. Best-selling author Dan Ariely will give us the honest truth about dishonesty. And as always, we've got a few stocks on our radar, but we begin overseas.

On Sunday, the people of Greece will go to the polls in a vote that could set the stage for whether Greece stays in the Euro. Ron, it seems like every few months we've got one of these break points, one of these big important moments coming up. But the people are going to the polls. What do you think of it? Well, Chris, I'm no international economics expert, but I do play one on the radio. So for me, it's really all about containment versus contagion.

Will this stay there in Greece, or is this going to bleed over to other countries and eventually the U.S.? Will there be runs on banks? Will the euro collapse? All those things. I can't predict it. I honestly don't know what will happen. I have a feeling the worst will not happen, but perhaps the best won't happen either.

So maybe we might kick this can down the road a little bit more. Monday will tell us. So how are we richer for your knowledge? What did you actually say? Well, I believe I explained the contagion versus contagion. Okay, you're right. Okay, that was good. I got two vocabulary words out of that.

James? You know, Greece got invited to a club that they shouldn't have been invited to. They stayed in when they should have been kicked out. They nearly bankrupted the whole entity, and now they want out, which we all knew. That's not really the big thing. I think the big thing is what happens to, well, how do they exit is the first thing, if they do exit, and is Europe actually better off with them out? Those would be, I think, the operative questions,

and I think it's going to be a little cheaper to go to Greece pretty soon, too. Joe? Yeah, I think they should just take the Band-Aid off. It's going to be a brutal time for a short while, but ultimately I think we'll be better off once Greece does exit the Euro and we can all kind of move on. So summarize, containment versus contagion. Yeah. Suffice to say, on Monday's Market Foolery podcast, I think we'll have a better sense of how the vote went down and how the market reacted.

Jamie Dimon, the CEO of JPMorgan Chase, testified before a U.S. Senate panel this week. He was there to answer questions about his firm's recent multi-billion dollar trading loss. James, there was some political theater, as there tends to be in Washington, D.C., but beyond that, what was your takeaway? Chris, the lesson of Jamie Dimon is that if you have absolutely no idea what's going on, at least say so with conviction and it'll come across well. He does that very well. He is poised. It doesn't change the fact that executives had no idea what was going on about their traders who apparently also had no idea what was going on. I don't buy that this is a big hedge. The trade is still murky and I think that's the problem.

This London whale guy was apparently compensated by a percent of upside, which is not commensurate with a hedging strategy. So I don't think we know anything more. I think they should be punished, but we are where we are. Ron? Well, one of the things Diamond said is that the buzzword is we want smarter regulation, not more regulation. And he's the first one to point out that it's very difficult to draw a distinction between a hedge and proprietary trading. You could look at it both ways. Almost every trade you could look at it both ways because they're both designed.

If a hedge is designed to mitigate a loss, that is still a way to prop up earnings through distinct trading mechanisms. systems. So, it's very hard. This, to me, is a bigger story than J.P. Morgan, because even with this $2 billion or more loss, they're still quite profitable, a very well-run bank. It's going to get down the road into, where do we go with regulations, with the Volcker Rule and Dodd-Frank, the costs associated with complying with these regulations? Do people start going to overseas banks, because they don't want to deal with our regulation here? That creates some competitive issues. O' Well, Banco Santander?

There are some real banks out there in the world. O' National Bank of Greece? There you go. I mean, Joe, to Ron's point, I mean, this is obviously a lot bigger than just JPMorgan Chase. And certainly, it could have been any of those other big banks. I mean, we could be sitting here talking about Bank of America, Citigroup, Wells Fargo, Goldman Sachs, any of them could have had this. How do we prevent that? How do we prevent the next sort of billion dollar trading loss blow up? I don't think you can. Banking by its nature is risky. If a bank makes a loan to you on your mortgage, they are making a proprietary trade and a

bet on your ability to pay them back. And that's just something that's baked into the nature of banks. Now, their ability to manage that and how greedy they are, which I'm sure James would say, to his point, it was obviously a move where they're trying to make money and it wasn't a hedge, that's an issue. But I do think these guys ultimately serve a pretty decent purpose here in fueling the economy, and I don't think we should penalize them too harshly for that. I mean, the stock's down $20 billion on a $2 billion trading loss. So you could say that the market has already punished them. James? My view is bleaker. I think the banks are, there are different segments of banking. Yes,

some aspects of banking are risky, but the basic making loans and getting repaid is a lot less risky than a lot of what we're seeing here, this proprietary trading. I think, I hope in 20 years, will have separated the banks. I mean, I think what they're doing right now is sort of like almost an arbitrage play where they're taking money. They've been for the past couple decades taking money from the safer areas of their business sphere and using it to take fat-tail risks, basically low-probability events of very big losses in other spheres. And that's given them a lot of profit.

It's kept some of the banking fees down on the retail side, but it also has enabled these occasional blowups to happen like this. I want to get back to the regulatory stuff in a minute, Ron, But first, at the end of the week, we saw media reports that Moody's may be prepared to downgrade these big U.S. Wall Street banks. Certainly, we've seen amongst the ratings agencies, you know, some following suit with S&P, with Fitch. First and foremost, do they care about that? Does that matter to them? I mean, it can impact the business and borrowing costs and things like that to a certain extent. But for the most part, no. These rating agencies are very reactionary.

They've gotten a little bit better since the financial crisis, but it's always after the fact. They could have said this chief investment officer of JPMorgan had improper risk management months ago, if they had really taken the time. Or years ago. Years ago. But they didn't, so it's reactionary. I don't put much credence into where the rating agencies go with respect to this. Joe, where do you think we're going with all of this? Is it a situation where

actually do need some new regulations? Do we just need to clarify the existing ones? Is there a point where, a year or two down the road, someone just decides, you know what, we can't have banks that are too big to fail, and therefore, we've got to break them up? Where do you think we're going? Yeah, it's easier said than done. I mean, when you look at the rules that have been laid out, the Volcker Rule, for example, is supposed to separate proprietary trading at banks from traditional lending as we know it. But what's happened is, it's the simple rule that's turned into this 289-page document that no one can agree on what it means. And

what these regulators forget is that when you create more rules and regulations, what ends up happening is you increase barriers to entry, and you just make it more difficult for people to come in and effect change and make things simpler. Ron, what do you think? Where are we going? I think that's exactly right. We definitely need regulation in this country, and specific to banks, but it has to be regulation that you can comply with for a reasonable cost, and that is not ambiguous. And this country's not that great at that kind of stuff.

I refer you to the IRS rules, for example. And it's tough because the banking industry has gotten so complicated, far more complicated than I think regulators can understand in some respects. It doesn't help that Jamie Dimon was lambasting the Volcker Rule about two months before this happened. Correct. But I did watch all of the testimony, and the man is rock solid. Great era. I think you have a man crush on him.

I'm just saying, he was not rattled, and he was great. You've spoken positively about him, too, before. I'm watching you. On Thursday, Nokia warned that its cell phone business is losing ground and it will cut 10,000 workers. Joe Mager, is cutting 8% of the workforce really going to reverse their fortunes? Better late than never. The stock's down 90% since the iPhone was launched, which pretty much sums up their pay.

Is that bad? Some would say. Only 10% more to go. Yeah. In the smartphone market, which is surging, they're just getting completely owned. Apple chopped them off at the top when they were ahead. And they're taking the entirely wrong strategy, which is trying to compete at low end and compete on smartphones and commodity phones. Well, those are the phones that anyone can produce, and they don't have any competitive advantage. So, you know, I give them a little bit of credit for taking a shot downfield by

partnering with Microsoft on their mobile operating system. But it doesn't seem to be working. And unfortunately, I think this is going to be a long, slow bleed out. Yeah, Ron, I mean, how much is this going to hurt Microsoft? Well, Microsoft really does want and need this to work out in some form, but I implore Microsoft publicly not to acquire Nokia. That would be a mistake. They don't need to be a hardware company in addition to a software company. The Lumia phone is not selling well. Windows Phone 8.0 is coming.

There is still a hope that that will sell. I feel like I've heard that before. I know. I hear you. It's not all peaches and cream here. This is trouble. We own Microsoft. We actually don't have any big growth projections in there for the phone business at all. We think the stock is cheap regardless of that.

That's smart. But we also don't want Microsoft to keep throwing good money at bad. They got on the wrong bus. Yeah. So if this Windows 8 doesn't work out, we need to cut bait and go somewhere else or come up with a different strategy. But the Microsoft ecosystem, the one that Apple already has among all its hardware and the software that's running on this hardware, is pretty important to Microsoft. So, if this doesn't work out, we'll have to watch that. Dell announced it will cut $2 billion in expenses over the next three years.

The company also announced its first-ever dividend for shareholders. James, I know you're excited about that. Calm down, James. But, Ron, let's talk about the cost-cutting first. Same question I asked you. How much is it going to help? Cost-cutting is always good. It's always interesting how companies identify additional cost cuts when things are going bad.

there's always costs that companies can bring out of the business. This is necessary. You can't cost-cut your way to profitability forever. Eventually, you really have to turn the business. They're attempting to pull an IBM 2.0 out of this, move away from PCs, not totally, of course, but into the enterprise business, into the advisory business. It's easier said than done. IBM is a tremendous success story with regards to that. Not sure Dell can really make it happen. Not coincidentally, HP is trying to do the exact same thing. The PC market's a have business to be in. HP Lee's, right?

HP's the number one. One of the worldwide in Dell. James, the Houston Chronicle, in referring to the dividend, wrote, Dell has finally come to terms with the fact that it is not a growth stock anymore. I mean, is that really what this is about? I think it is, and I think it's a mature decision. I think it's a decision that all the tech companies are starting to, or a lot of the bigger tech companies are starting to make, rightfully so.

They've got all this cash, and what else can they do? They can make silly acquisitions. They could repurchase shares if they want to. But a dividend is a prudent thing. And just to kind of circle back to Ron's point, I think the lesson learned from Dell is that, or the takeaways, value is not just correlated with size of the company. You can be a smaller company if you're making more money per unit of dollar invested and actually still return more per share value to your shareholders. So more companies need to do what Dell is doing and shrink and just take this tough medicine. So I actually applaud this.

Over the next five years, these two embattled tech companies, Dell, Nokia, which one would you pick, Ron? Well, I do own Dell, and I've owned it, I don't know, maybe a decade. So I'm going to stick with it, and I'm going to say that they do have a shot of turning this around, stick with some PC, move to enterprise. Balance sheet still is good, so they got a shot here. James? Kind of an awful choice, but I will go with Dell. Joe?

Yeah, I hate to follow suit, but I agree. I think Dell is the best play there. You know, Nokia is actually losing money at this point. They have a good bit of debt. They've got a lot of cash, but they also have debt. It's not really likely they're going to get taken out. Speaking of shaky acquisitions, as we were earlier, Microsoft is buying business networking site Yammer for $1.2 billion. Joe, Yammer bills itself as, quote, an enterprise social network.

First, what does that mean? And second, what do you think of this deal? See, it's social, Chris, which means it's a great purchase. This just takes me back to the mid to late 90s where companies are like, we have a website. It's like, oh, well, you have a website. There you go. Yeah, think of Yammer as kind of like an inner corporate Facebook, so like a mini Facebook within your own business, only with less features and people don't use it as much, and it's redundant with email.

Yeah, I do think Yammer as a product doesn't make a lot of sense. Yammer is a feature, does, and could be plugged into Microsoft Office in a really interesting way. We use SharePoint here at the office, and it's been pretty successful for us. And I think it's a good move for Microsoft strategically, because they're trying to fend off Google, whose Office package is actually pretty impressive. And one thing that people really like about it is that it's very social, and different people within a company can use it and play with it. And it's very adaptive.

Now, they're paying 16 times sales for perspective. The market's selling about two and a half times sales. So, a pretty rich price, but they've got a little bit of pocket cash, and they paid $70 billion over the last 10 years, and dividends. So, they do have a little bit of fiscal discipline. Ron, as Joe mentioned, they're trying to fend off Google. Did I take every number they're on? Well, I mean, they're also trying to fend off the likes of Oracle and Salesforce in terms of what they can do with Yammer, the way that they can deploy it. I mean, is this the best? I know they have a ton of cash.

Right, $58 billion of cash. They can part with one. If you had $58 in your pocket, you'd give me one. You'd be okay. So you're okay with this. If Steve Ballmer comes to you and says, I'm thinking about 1.2. They're beefing up their suite of services. They made a huge acquisition of Skype not too long ago. And as Joe said, they have SharePoint and all the other products.

Would you ever use Yammer yourself? I'm such an old man. I never accept. I don't know if that's considered rude in social networking, but I always reject it. It is. The acquisition, it's not a ton of money for them. Perhaps it will add to the suite of services. Maybe they could have set it on fire and warm the office.

Increase the dividend for me. That's what I want. Coming up, we'll give you an inside look at the stocks on our radar. You're listening to Motley Fool Money. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Welcome back to Motley Fool Money.

Chris Hill here in the studio with Joe Mager, James Early, and Ron Gross. Guys, a couple of welcomes to get to. We've got to welcome a new radio station to our affiliate family, KPQ AM 560 in north-central Washington State. Now running a lot of work. Love them on board. Welcome! And welcome to the rare in-studio guest, Mr. Ed Mager, Joe's dad. Welcome, sir.

We're going to get to the stocks on our radar. The guys will essentially pitch them to you. But first, it's rare that we get a guest in studio, and rarer that it's someone who is a small business owner. One tip for someone out there who is either starting a small business or running a small business, what would you tell them? Well, one, I'd like to start with this. I was put on the spot. I did not know I was going to do this until about 30 seconds ago.

So this wasn't a prepared thing. But one, I've owned my business for 13 years, came out of the corporate end of the world. And one thing I've made a big mistake on, and everybody should try to prevent to doing, you own your business. Don't let your business own you. and that should apply to about anybody great so take that advice and run with it i have conversations with probably 50 different business owners uh in my store uh weekly and i hear so many people made the same mistake so great run gross you're up first pitch mr maker all right mr maker

i don't know about you but i love myself a good steak and when i'm ready to splurge i head over to my local Ruth's Chris restaurant. So I'm going to recommend Ruth's Hospitality Group to you. Ticker symbol R-U-T-H. Microcap stock, plenty of room to run here. 153 restaurants, including Mitchell's Fish Market, for those of you who perhaps would stay away from the beef. But it's plenty of room to run.

Seven times cash flow, not too expensive. Okay. James, what do you got for Mr. Mager? Well, I'm going to be very honest with him because he seems the kind of guy who appreciates a candid pitch. I have Diageo and United Breweries on my income investor scorecard, and I know you have a liquor business, but I feel those are a little bit rich right now. So I'm going to put you into a partnership called Stone Moor Partners. This pays a 9% dividend.

This owns a bunch of 250 cemeteries across the U.S. It's not sexy at all, but I see 44% upside here, and we've got a lot of baby boomers. So there's always going to be this ongoing need for this business, like it or not. So it's a little bit practical. Joe, go ahead. Well, Dad, we're a Maker's Mark household, and Maker's is owned by Beam. It's an incredibly profitable business. I know you know plenty about it because you've stocked endless cases of it over the years.

They own Beam, Maker's, Saza, Pinnacle, Skinny Girl. Great suite of brands, great distribution, great margins, nice dividend. Mr. Maker, you've heard three stocks. Which one caught your fancy? Who? Well, you know I'm going to have to go with my son, obviously. Only because it was the best bid. And for the main reason, one, I do know that industry very well and the things that he just mentioned and the beam right now, what they're doing with the skinny girl is out of control.

And so I'm going to have to go with my son. Thanks. I love you, Dad. We'll have to end there. Joe Meagher, James Hurley, Ron Gross, and Mr. Ed Meagher, thanks for being here. Oh, thank you. My pleasure. coming up best-selling author dan arieli shares the honest truth about

dishonesty stay right here this is motley fool money welcome back to motley fool money i'm chris hill dan arieli is a professor of psychology and behavioral economics at duke university and the author of two bestsellers predictably Irrational and the Upside of Irrationality. His new book is The Honest Truth About Dishonesty, How We Lie to Everyone, Especially Ourselves. Dan, welcome back. Oh, my pleasure. So we're all liars? What is going on? Wait, wait. Not you. Not you. Other people. Other people.

Oh, thank you. Thank you. So here is the question. I mean, you probably think of yourself as an honest, wonderful, caring human being, right? No question about it. No question. But if you actually went ahead during a regular day and you counted how many times you lie, what do you think that number would be? I think it would be in the single digits. Well, I recommend this experiment, but what is clear is that we lie a lot. And what's interesting is that we lie a lot, and at the same time, we think of ourselves as honest.

Now, in Japanese, there's a term. There's a term for internal truth, the real truth, and there's a term for the truth we tell other people. And not just for Japanese, we all have this. We all have something that we trade off. Now, the truth is there's lots of human values. Honesty is one of them, and not all human values are compatible. So what happens when somebody asks you, how do I look in that dress? Or what happens when somebody asks you a question that would make them,

the answer would make them feel bad? All of a sudden, we think differently about honesty. We trade things on differently and make a different decision. Now, imagine you're an accountant, And all of a sudden, you're faced with the same dilemma of the truth inside and the truth to the outside world. Now, how does that work? And it turns out in those cases, too, people find all kinds of creative ways to cheat a little bit and still think of ourselves as good people. Now, the origin of this book, as you write about, really goes back a full decade.

That's when you got interested in dishonesty was with the collapse of Enron. what was the problem at Enron was it really just the guys at the top because that's that's how it seemed to be for a lot of people that's exactly right when we think about Enron we think about three terrible people who plotted and executed a large accounting scheme but the question is this really a good description of what's happening and you can say maybe that's the case or maybe it's a lot of people who were slightly motivated to not see reality in a correct way, including consulting firms, auditor, people who worked within Enron, all kinds of people. And the reason this is an important question is that the way to solve dishonesty

is different, whether it's a few bad apples or lots of us can cheat a little bit. And in the experiments we ran, we basically find that there are bad apples, but there are incredibly few of them. So just as an example, our basic experiment looks like this. We take a sheet of paper with 20 simple math problems that everybody could solve if they had enough time, and we tell people, solve as many as you can in five minutes. People work very hard. At the end of the five minutes, we say, stop. Please count how many questions you got correctly, and now go back to the back of the room and shred your piece of paper, and then come back to me in the front of the room and tell me how many questions you got correctly. People do this. They go to the front of the room, and they

say they solved six problems. But what they don't know is that we can go back into the shredder. The shredder, we fixed it so that it only shred the sides of the page, but the main body of the page remains intact. And now we can go in and we can find how many questions people really solved correctly. And what do we find? The average solved four problems and report to be solving six. And the way it works is that we have lots of little cheaters and very few big cheaters. So in the book, in total, I described lots of experiments. In total, we had about 30,000 people in the experiments. And from those, about 12 were big cheaters. They basically claimed to have solved lots of the problems. And maybe they took about

$150 from us. At the same time, we had about 18,000 little cheaters who each individually did not steal that much, but together they stole about $36,000 from me. And if you think about it, I think this is kind of a good reflection of what's happening in society. Sure, there are some big cheaters out there, and it's really terrible and annoying, and every time somebody breaks into my car and steals my GPS, it's very annoying. But the reality is that the big financial devastation probably doesn't come from that. It comes from the lots of good people who cheat just a little bit, many times, but it adds up very, very quickly. Now, you write about things like conflict of interest, and certainly that is something that we see at The Motley Fool in the financial services

industry. To what extent does full disclosure, the whole notion that the best disinfectant is sunshine, to what extent does full disclosure really solve the problem of conflict of interest? It's actually worse, right? So it's not just that it doesn't help, it can hurt. And here's basically the finding from the research. So imagine that you have two parties. You have a financial advisor and you have a client. And the financial advisors, if they have a conflict of interest, that of course biases their opinion.

Now, I should point out that the logic for conflicts of interest is that people are doing everything consciously, right? It says that the financial advisor is planning to deceive the client. And because of that, if they only had to disclose, they would not plan to deceive the client in the same way. I think this is actually not fair to financial advisors because I think that much of the conflicts of interest is something that they themselves don't see. If I had, you know, put two portfolios I could propose to you, one of them from company A and one of them from company B, and company B promised me some kickback. The question is, would I think to myself, oh, I'm cheating you by proposing B, or would I actually start seeing reality from the perspective of company B? And I think the second one is more likely, that I'll actually change my view of reality.

But here is what happens with disclosure. So again, we have an advisor and we have a client. And the advisor exaggerates their opinion a little bit to fit with their internal financial interest. And now what happens when there's disclosure? Now the client knows that something is fishy and they discount the opinion of the financial advisor. But at the same time, and that's good, right? That's what disclosure is supposed to do. But at the same time, the financial advisor is not necessarily staying static.

The financial advisor might not behave in the same way when they disclose to when they don't disclose. And what the results find is that when people disclose, the financial advisors disclose, they actually exaggerate the opinion even more. so now the question is what is larger the extra exaggeration of the financial advisor when they have a disclosure or the discount of the client and sadly the results show that it's the extra exaggeration of the advisor rather than the client so in this case disclosure actually makes things worse because the advisor exaggerates by a higher amount and the client doesn't understand how big conflicts of interest are. He doesn't discount sufficiently. And because of that,

the client's financial situation at the end of the deal is even higher. So for people who are working with a financial advisor, what is one thing that people can do to essentially keep their financial advisors more honest? So I don't think there's one thing. First of all, I think we need to be aware of conflicts of interest. It's really a good discussion to have with a financial advisor. By the way, it's very tough because many people have their financial advisors are friends or neighbors. They have kids in the same school. And to go to the financial advisor and said, you know, I suspect that you probably have some conflicts of interest. Let's examine them. But I think it's incredibly

important, right? Because it's a little socially embarrassing, but it will be nice to do. So I think people should go to the financial advisor and figure out how many conflicts of interest they have. And then they should also make a list of a contract between the financial advisor and the individual and agree what to do with these conflicts of interest. For example, the financial advisor could agree to never put in your portfolio stuff that he gets a kickback on. Or he can agree to never have what is called soft dollars from the people he's dealing with. Or if he does do that, that he would let you know. I think basically trying to figure out what are the exact rules of behavior.

Here's the thing. Every time that we have large and unclear gray zones in terms of what is acceptable and not acceptable, people would interpret them in ways that are selfishly good for them, even if they care about the person sitting across the table from them. So what you want to do is you want to create very strict rules about what is acceptable and not acceptable. Now, on top of that, we can look for financial advisors

that have less conflicts of interest. I think, in fact, that if people started demanding financial advisors with less conflicts of interest, financial advisors will have to deal with that and will have to change in some important ways. We can also think about how do we pay financial advisors? You know, is the percentage of asset under management a good idea? And finally, I think all the hidden fees that financial advisors have should come out. So we should be aware of what they're paying. we should agree with them up front. I don't think financial advisors will sit across the table from the client and lie to them directly. But lying indirectly with all kinds of fees and payment

and back payments, there are probably too many of them do too routinely. I know that you were doing these tests and essentially setting out to write a book about dishonesty. But were you surprised by the level of cheating that you did discover? And if not, What surprised you the most when you were working on the book? So the amount of cheating surprised me, how much, how prevalent it was, right? I expected to see some of it. But the two things that surprised me the most are the following. The first one is that experiment that we did on the distance from money.

So imagine the regular experiment. People work on this sheet of paper. They shred it. They come to the experimenter. They report how many questions they got correctly. and they say, Mr. Experimenter, I solved six problems, give me $6 on average. When in fact, they only solved four. The second group come to the experimenter and instead of saying,

I solved X problems, give me X dollars, they say, I solved X problems, give me X tokens. And we pay them in pieces of plastic. And then they walk 12 feet to the side and change every piece of plastic for a dollar. Now think about this. This is a very simple thing. it's about being one step removed from money there's a little joke that johnny comes home from school with a note from the teacher that said that little johnny stole a pencil from the

kid who's sitting next to him and johnny's father is furious he said johnny i'm embarrassed and humiliated you never never never steal a pencil from the kid who's sitting next to you you're grounded for two weeks and just wait until your mother comes and beside johnny if you need a pencil, you could just say something. You could just ask and I will bring you dozens of pencils from the office. Now, this is basically the question we asked. What happened if you're one step removed from money? And what we found was that people doubled their cheating, right? And for me, this was the most disturbing result in that experiment because we're moving to a cashless society. We're moving to a society that has electronic wallets. We're moving to a society

that has high-order representation of money, stock, stock options. We have derivatives. We have mortgage-backed securities. And the question is, could it be that with all of this increased distance from money, people can both act more dishonestly but feel better about their own behavior? And I think the answer is basically yes. So this actually worries me a lot. And I think that as we move to have more distance between us and the consequences of dishonesty and the consequences of the money, we need to take extra precautions about being honest.

Coming up, more with Dan Ariely, including a round of Buy, Sell, or Hold. Stay right here. You're listening to Motley Fool Money. Welcome back to Motley Fool Money, talking with bestselling author Dan Ariely about his new book, The Honest Truth About Dishonesty. One of the things that you discover through the tests that you put people through in this book is that when people sign their names to some sort of pledge, it puts them in a more honest frame of mind. And armed with that information, you go to the IRS and basically say, listen, why not have taxpayers sign their names at the top of the tax forms rather than the bottom? How'd that go over with the IRS? Yes. So first of all, I think the finding is just, I love the finding. I love the idea that when you get people to sign at the top of the form, they're more honest. When they sign at the

end of the form, it's over, right? People finish cheating. And it basically tells you that when you get people to think about their own morality, people behave much better, which tells you actually people are quite good and have a desire to be good. We just need to remind them about their own desire. So I went to the IRS and the first thing I proposed was I said, let's get people to sign at the top. And they said, well, that's illegal because the signature is for verification. Now, in my mind, the verification is not that important. What's important is the mindset. And because of that, it's important to do it in the beginning. So then I said, why don't we do it both? Let's do it up front for a mindset and the end for verification. So they said that

that's confusing. Now, if you've seen the IRS forms recently, you would know that that's really funny that they think this is confusing. Yeah, that's a high priority for them. That's right. Confusion, clearly, clearly they're working on that. And then the third thing I proposed was why wouldn't we have the first item on the tax return to ask people whether they would contribute $25 to a task force to fight corruption? And I said, if people do that, not only would they have said something about their own morality, they would have put some money down, and that would have even made the statement stronger. Plus, I propose that people who don't want to give money to a task force to fight corruption might be good candidates for audits. But we

didn't get very far with the IRS. I'm still hoping. The British government has now an Office for Behavioral Economics, and they're doing all kinds of things, and they're going to try the signature solution as well. But we did try it with a big insurance company. And this is an insurance company that sends people a letter asking them to tell us how many miles they drove, what's the odometer reading. And some people did the regular trick, which is to fill the form and then sign at the bottom. And for some people, we flipped it. And they signed first, and then they filled the numbers. And what we found was the people who signed first cheated by 2,400 miles less on average. Now, we don't know if they didn't cheat at all because we couldn't go back to their actual

odometers, but at least they cheated much less. Now, this for me is incredibly optimistic on two grounds. First of all, it means that the experiments that we do in the lab seem to replicate in real life in some nice ways. It seems that the magnitude of cheating is about 15%, so kind of there's a similarity even in magnitude, but it also means that there's all kinds of small tricks that we could do that would get people to behave much better and are actually not expensive and are simple and cheap and we just need to implement them. All right, Dan, we will wrap up with a round of buy, sell or hold. Let's start with buy, sell or hold a nationwide ban on texting while driving. I would not hold much faith in bans. I think basically expecting to give people cell

phones that they play with throughout the day and then expecting that they will not text and drive is kind of like covering your desk with donuts and hoping that you would not eat them. I think we need some better technological solution that will not allow people to text and driving even if they want to. Buy, sell, or hold renewing one's marriage vows publicly once a year? Absolutely buy. I think reminding ourselves about what we stand for and what we want is incredibly important. And I think that before you do that, you're probably not able to estimate correctly the impact it will have on your behavior. But much like signing the owner code, I think that would actually be quite useful. And finally, keeping in mind your lovely wife,

Sumi, to whom you give great thanks at the end of this book, buy, sell, or hold engaging in a policy of total honesty in one's marriage? Definitely not. This is not a good recipe for a good life. I'll tell you one thing. There's a story in Judaism that God comes to Sarah, and he said, Sarah, you're going to have a son. And Sarah said, how can I have a son when my husband is so old? And then God goes to Abraham and said, Abraham, you're going to have a son. and Abraham asked did you tell Sarah and God said yes and Abraham said and what did Sarah said

and God says Sarah said how could she have a son when she is so old and the religious scholars have asked the questions of how can God lie how can it be that Sarah said how can I have a son when my husband is so old and God said to Abraham

Sarah said how could she have a son when she is so old and the interpretation has been that peace at home what's called in Hebrew Shlombayt is more important than honesty. The book is The Honest Truth About Dishonesty, How We Lie to Everyone, Especially Ourselves. It is available everywhere.

It is always fascinating to talk with Dan Ariely. Dan, thank you so much for being here. My pleasure. Great talking to you. Take care. Your cheating heart will make you weep. You'll cry and cry and try to sleep, but sleep won't come the whole night through. Your cheating heart will tell on you. Hey, if you're looking for a little help making decisions, Dan Ariely has just released a new app called Conscience Plus.

It's a free app that will help you with those challenging day-to-day decisions like, should I eat that dessert? Should I include this item on my expense report? You can check it out at the iTunes App Store. It's completely free. It's the new app called Conscience Plus. That's it for this edition of Motley Fool Money. Our engineer is Steve Broido.

Our producer is Matt Greer. I'm Chris Hill. Thanks for listening. We'll see you next week.