Motley Fool Money - Motley Fool Money: 08.31.2012

Episode Date: August 31, 2012

We revisit some of our favorite interviews on our Labor Day Special.  We talk about the business of lying with Dan Ariely, author of The Honest Truth About Dishonesty:  How We Lie to Everyone - Especially Ourselves.  And former Gambino family associate Louis Ferrante talks about his book, Mob Rules: What the Mafia Can Teach the Legitimate Businessman. Learn more about your ad choices. Visit megaphone.fm/adchoices

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From Fool Global Headquarters, this is Motley Fool Money. Welcome to Motley Fool Money. I'm Chris Hill. This week, it's our Labor Day weekend special. We'll get some career advice from a former mobster, but we start by talking about the business of lying. Dan Ariely 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, wait. Not you, not you, other people, other people.

Oh, 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 a 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 the Japanese, we all have this. We all have something that we trade off. The truth is there's lots of human values. Honesty is one of them, and not all human values are compatible.

So what happened when somebody asks you, how do I look in that dress? Or what happens when somebody asked 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 differently and make a different decision. Now, imagine you're an accountant. And all of a sudden, you're faced with a sense.

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 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, or people who worked within Enron, all kinds of people. And the reason this is an important question is that the way to solve this honesty 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 they're 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've 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 solve correctly.

And what do we find? The average solve 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, 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 for 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 steal my GPS, it's very annoying. But the reality is that the big financial devastation probably doesn't come from that. It comes from 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's the whole notion that's the moment that

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 conflicts 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 exaggerate your opinion a little bit to fit with their internal financial interest. And now what happened when there's disclosure? Now the client know 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 result find is that when people disclose, the financial advisors disclose, they actually exaggerate your 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 result 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 advice. advisor exaggerate 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 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 rule 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 advice and 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? 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 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 surprise do 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 the 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 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. 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-the-order representation of money.

Stock options. We have derivatives, we have mortgage-backed securities. And the question is, could it be that with all of this increased distance for 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 are dishonesty and the consequences of the money,

we need to take extra precaution about being honest. Coming up, more with Dan Ariely, including around Buy-Seller Hold. Stay right here. You're listening to Motley Full Money. Welcome back to Motley Full 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 a 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 at 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. 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 from, with the IRS. I'm still hoping the British government has now an Office of 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 odomatory 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 odomators, 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 similar 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-seller hold. Let's start with buy-seller 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 would not allow people to text and driving, even if they want to. And finally, keeping in mind your lovely wife, Sumi,

to whom you give great thanks at the end of this book, buy-seller 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. 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 Shlombaite, 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. Coming up, business lessons from the mob. Stay right here. You're listening to Motley Fool Money.

Welcome back to Motley Fool Money. I'm Chris Hill. Forget Harvard Business School. My guest this week says, you want to learn about business? Study the Mafia. Louis Ferranti is a former insider with the Gambino family. And after spending eight and a half years in prison, he is now an author and motivational speaker. his latest book is Mob Rules, What the Mafia Can Teach the Legitimate Businessman. And he joins me now.

Lewis, thanks so much for being here. Thanks for having me, Chris. I'm happy to be on your show. I want to talk about the book in a minute, but first, let's start with your own experience. What was your role in the Gambino family, and what was the primary business of the Gambino family? Well, the primary business, to answer the latter questions first, the primary business is profit, making money. I kind of had, I guess you could say the commission, which you made manager, only in handing them down to my crew, and I was a CEO of my own crew.

And guys that answered the company within the family. Wow, it's amazing. I guess I never thought of the mafia as having middle managers. I just think of that as sort of like, you know, office parks out somewhere have middle managers. Yeah. The middle managers are usually like cop analogy you could use for them. But yeah, it's it. And in terms of your own operations for your own little business,

you were, among other things, hijacking trucks, weren't you? I was. I was the guy of the family thing. I had like a hijacking, a vault, whatever it might be. If you think about it, just imagine how funny. So you end up eventually going to prison, and what changed for you in prison? How does a guy go from being an elite performer for a mob family to becoming an author of multiple books? Well, my eyes opened up in a prison cell, and I saw that, you know, there is a violence. That was the moral question, but aside from that, you know, where was I going?

I said, hey, am I going to come out of jail one day and then send me away again? Change like anybody can be doing in the real world and say to me, and they may leave their company. So when you're, you know, on the inside, you make this decision to sort of turn your life around, what leads you to the world of writing? I was locked in the South Queen's Social Club. John Gotti was the big reigning boss at the time, and he was the caretaker of the club, and he had all these tattoos on his body,

and some of the tattoos that he at least read the body, had the knowledge to put these biblical verses on him, and he sent me Napoleon. So did you get these ideas? He told you, he said, I told you he was short and bossy. With that, he sent you three dictators. I understood him through them,

but as I kept going, and as I kept reading more and more books, Luckily, I went to jail, and then it twisted I was reading, and that's how I taught myself out of right. You're listening to Motley Fool Money? I guess this week is Louis Ferranti, author of the new book, Mob Rules, What the Mafia Can Teach the Legitimate Businessman. Before we get to a few of the rules, a couple of questions about the mob itself. In what industries is the mafia most prevalent? Today, Chris, I would say that they're losing their strong that they once did hold.

uh... when i was coming up in the mob a lot of the old time is had control of the port they had control of the garment center as new york is concerned job in cleaning a lot of really uh... you know that so today i mean today they're probably grasping on to a few unions now you know i've been out of that life since i came home from prison i went straight i'm a writer now but uh... from what i understand they have a you know so you know they're still there but uh... bigger industries

now at the motley fool when we're looking at businesses and industries one of the questions we like to ask as investors is what's the opportunity here for this company? So you say they're losing their stronghold. What is the big opportunity for the mafia these days? I would say that it was at one point. So the opportunities that are out dealing and stuff like if I was... You're listening to Motley Full Money, our guest this week. Louis Ferranti, author of the new book, Mob Rules, What the Mafia can teach the legitimate businessman. Let's talk about the book. I want to spot you up with some of the business lessons in the book and have you elaborate on them.

Let's start with one, which is get your own coffee. Example in that chapter, that's a real prime example. I mean, there were a number of examples that popped in my head. The full chapter title is respecting the chain of command without being a sucker. And that's go get your own coffee. Here in the mob, you can't spend your day making coffee for the boss. You're never going to go anywhere. And, you know, in the corporate world,

Rappuccino, at Starbucks, but a high-ranking Gambino, so he didn't know me. He knew, he met me really on the street. There's a lot of Gambino family members. You don't know every single one of them when you're on the street. You're in my pants, me, and I said, hey, I don't do my own pants. I pay somebody to him.

You know, so he asked me again, and because of his high-rank, and he was twice my age, and he was a Gambino guy also. In my pants, I'm not here facing him. I could have gotten that. that job easily. So he laughed and we got along after that. And in the end, to make sure he was my friend, I'd be tremendous respect after that. And he would never ask me to do it. So there are ways in the corporate world when sending you for coffee every day at Starbucks. You could

let the boss, you know, get the message in a funny way. Coming up, more mob rules with Louis Ferranti. Stay right here. This is Motley Full Money. You're listening to Motley Full Money. Our guest this week, Lewis Ferranti, author of the book, mob rules, what the mafia can teach the legitimate businessman. Another rule from the book, don't build Yankee Stadium, just supply the concrete. Great chapter. This chapter is, when the mob operates, and you were asking earlier about, maybe years ago, the mob was a contract to build Yankee Stadium, or somehow, now, they may see,

they may look at Yankee Stadium as, gee, maybe we can't get the major contract to build the stadium. a hundred thousand ancillary needs that the stadium needs that we could provide, whether it be concrete, whether it be plastic seats, whether it be some ponderate, sit in a coffee shop if they were faced with this and say, oh, well, we could stop by opening up sausage and pepper stands. Then we could get, oh, there's flag poles, obvious. We'll see if we could get them cheap enough.

We could get the contract for flag. I know Johnny signs. Johnny signs make signs over in Brooklyn. The A, the N, the K, the DAA, really, really from every different direction. and there might be areas of the other people would turn their nose up that and the mob will run into. You know, a mobster might, let me get the bathroom contract. All I need is the urinals, and I'll have a $4 million contract just putting the urinals in. You know, so this is what the mob does, and they really, really then work hard at getting anything that could be put to use in that stadium.

And they work at getting those contracts. They use their networking capability. It's huge in the mob. Every mobster has a huge list of legit and illegit friend accomplished. Another lesson from the book, which is near and dear to my heart, certainly my favorite film of all time, and the lesson is leave the gun, take the canoli,

and beware of hubris. This particular chapter, I started out with, leave the gun, take the canolies. When I left the mob, I left the gun behind, and that's symbolic for the violence in the way to differ each other. The conoles are the sweet things I've learned along the way. And beware of you, Brist.

This very, very, the examples I used was a national leader. Pretty much through his, and he was a good boss, the mob to its ruin by being so flashy and causing so much attention. We're going to wrap up with a round of buy-seller hold, and let's start with this faces more and more competition.

Buy-seller hold, the future of Atlantic City. Just briefly? Hold for another year or two and see where it goes. People still like a place to go. people still likes will not overcome book. The one was going to want to buy a book again, but they're the same thing with Atlantic City. I'd top in that prime rib dinner that they can't get in their living room.

You know, the whole, that nice Romeo and Juliet cigar that the waitress is going to bring over with the bunny outfit. You're not going to get that in your living room. But then again, you're going to lose a lot of people. Do their thing. So I would hold it and see where it goes. It's a new TV show on VH1 following some women affected by the mafia. buy-seller-hold mob wives.

I'm going to go by the many fan mails I've gotten from around the country who've read my first book telling me that it stinks. Self, I just have tremendous, my fan mails have been inundated with people. Fair enough. And finally, the Hurricane is an Oscar-nominated film about a tough guy who becomes a writer in prison. Buy-seller-hold, a movie based on the life of Louis Ferranti. Buy.

Put all your money on it. And, I mean, you get to cast it. Who are you picking to play you? 20 years ago when I was running around on the streets before I went up, maybe an up in comma that I haven't even seen yet. The book is mob rules, what the mafia can teach, the legitimate businessman. It's just out this week. It is available everywhere. Pick up a copy. It is great stuff. Lewis Ferranti. Thanks so much for being here.

Thank you so much, Chris. I had a great time with you. That wraps up our Labor Day weekend special. you know, you can always drop us an email. Love to hear from you. Drop us an email. It's Radio at Fool.com. That's Radio at Fool.com. Tune in next week when we'll be analyzing the latest from Wall Street, including the big events, Microsoft and Google, have scheduled to unveil their latest products. The conversation continues online at fool.com. That's it for this edition of Motley Fool Money. Our engineer is Steve Broido. Our producer is Mac Greer. I'm Chris Hill. Thanks for listening. We'll see you.

you next week.