Motley Fool Money - The Business of Lying

Episode Date: July 22, 2016

On this week's show, we revisit two of our favorite interviews. Behavioral economist Dan Ariely, author of The Honest Truth about Dishonesty, talks about the business of lying. And former mobster 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

If you're a small business owner, you already know what it takes to keep everything moving. You're juggling customers, invoices, and about 100 decisions every day. Thankfully, taxes don't have to be one more thing on that list. With Intuit TurboTax, you can get your business taxes done for you with a full service expert. TurboTax matches you with your dedicated tax expert. Who knows your industry understands your business write-offs and gives you the personalized advice your business deserves. upload your documents right in the app, hand everything off, and still feel like you're in the loop the whole way through. You can even get real-time updates on your expert's progress right in the

app, which makes it so much easier to stay on track. And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full service experts. This episode of Motley Fool Money is brought to you by Rocket Mortgage by Quicken Loans. Rocket Mortgage brings the mortgage process into the 21st century with a fast, easy, and completely online process. Check out Rocket Mortgage today at quickenloans.com slash Fool. Everybody needs money. That's why they call it money.

From Fool Global Headquarters, this is Motley Fool Money. Welcome to Motley Fool Money. I'm Chris Hill. This week, two of my all-time favorite. favorite interviews. We'll get some career advice from a former mobster a little later, 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, what is it?

going on and what? 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 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 happened when somebody asks you, how do I look in that dress? Or what happens when somebody asks you a 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 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 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 the 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 work 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 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 reports. 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 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 still 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 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 their 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 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 their 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 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 advisors 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 their 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 most when you were working on the book? So the amount of cheating surprised me, how much, how prevalent it was, I expected to see some of it. But the two things that surprised me the most are the following. The first one is that experimented 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 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 double 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 the money, 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 precautions about being honest. Coming up, more with Dan Ariely, including a round of buy-seller hold. Stay right here. You're listening to Motley Fool 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 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 odomity 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'd 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 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 bands. 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. 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 you said, Sarah, you're going to have a son. And Sarah said, how can I have a son?

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 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 Full Money. This episode of Motley Full Money is brought to you by Rocket Mortgage by Quicken Loans. You know, if you've ever bought a home, I don't have to tell you how frustrating and time-consuming getting a mortgage can be. Fortunately, Rocket Mortgage brings the mortgage approval process into the 21st century by taking all of that complicated, time-consuming, everything that goes into applying for a mortgage.

They just take it right out of the equation. With Rocket Mortgage, you can easily share your bank statements and pay stubs at the touch of a button, helping you get approved in minutes for a custom mortgage solution that's been tailored to your own financial situation. And here's the best part. You can do it all on your phone or tablet. So if you're looking to refinance your mortgage or buy a home, check out Rocket Mortgage today at quickenloans.com slash fool. Equal housing lender, licensed in all 50 states, NMLS Consumer Access.org.

number 3030. Welcome back to Motley Full 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 is they're making money. I kind of had, I guess you could say I shared three different commissions, which you make. You get a manager, handing them down to my crew, and I was a CEO of my own crew. I'm guys that answered the direct family. We know you answer to the franchise. Wow, it's amazing. never thought of the mafia as having middle managers. I just think of that as like sort of like, you know, office parks out somewhere have middle managers. Yeah. The middle managers are usually

like capos. 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, the family thing. I had a, like a jacking, a vault, whatever it might be. 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, race to God, my eyes opened up in a prison cell, and I saw that in violence. You know, where was I going? I said, hey, am I going to come out of jail?

Way again. Change like anybody can. 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? 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 had the knowledge to put these biblical verses on him. So he's autobiography and a biography about Napoleon. So I could get these ideas. He said, I told her he was short and bossy.

With that, she said, it's redictory of my reading. But as I kept going, and as I kept reading more and more books, I thought, luckily I went to jail, and in a twisted I was reading. You're listening to Motley Full 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 stronghold, that they once did hold. When I was coming up in the mob, a lot of the old timers had control of the Garmin Center. There's New Yorkers' job in cleaning a lot of that stuff. We really, you know, back from the mafia. So today, I mean, today they're probably grasping on to a few unions.

Now, you know, I've been at, I've been from prison. I went straight. I'm a writer now. But from what I understand, they have, you know, a couple of strongholds as far as unions are concerned. It's very, very big for everything you could think. So, you know, they're still there. 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 know, you say they're losing their stronghold. What is the big opportunity for the mafia these days? I would say that it's a drug dealing and stuff like a lot better. You're listening to Motley Fool Money or 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, 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, here in the mob,

you can't spend your day making coffee for the boss. You're never going to go anywhere. Rappuccino's at Starbucks, but a high-ranking gambol he didn't know me. He knew he met me really on the street. There's a lot of Gambino family members. He's wearing my pants. And I said, pants, I paid somebody to him.

So he asked me again, and because of his high rank, and he was twice my age and he was up into a ball. No offense. I'm not here facing the rest. So he laughed, and we got along after that. And in the end, to make sure he was my friend, I agree to get him a brand new, 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, Louis 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. There is, when the mob operates, and you were asking earlier about, maybe years ago the mob was a huge contract to build Yankee Stadium or somehow, now being that the major things, they may see, they may look at Yankee Stadium as, gee, maybe we can't get the major contract to build a stadium. So what we need, that the stadium needs that we could provide, whether it be concrete, whether it's in a coffee shop, if they were faced with this, and say, oh, well, how can we move in?

Well, we could stop by opening up sausage and pepper stands when the workers get there and hot dog stands. Make sure all the workers are supplied with our food. I definitely try to get the, we could get, oh, there's flagpoles. I know a guy, Bobby Flagpole. He sells flagpoles. I'll get the flagpole. We'll get them cheap enough. We could get the contract for

flagpoles. The sign. Oh, I know Johnny signs. Johnny Sines make signs over in Brooklyn. Maybe we could make the Y, the A, the N, the K. You know, and they'll try to really, really every different direction. And there might be, 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 say, I could supply the urinals. Let me do the, 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 to getting anything in that stadium. Working huge in the mob. Every mobster has a huge list of 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. I started out with, leave the gun, take the canoles. When I left the mob in the way, there were a number of mobses who did that. That was the gonoli,

the sweet things I learned along the way. And beware of hubris, the second part of that chapter, to people who make examples I used was a national leader. It was pretty much through his, and he was a good boss, 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? Hocos, people still like a place. E-books will not overcome books complete. And that prime rib dinner that they can't get in their living room, that nice Romeo and Juliet.

But then again, you're going to lose a lot of people. 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 telling me that it stinks. I'll sell. Tremendous.

My fan mails have been inundated with people saying it's the worst show they've ever seen, so I'd say sell. 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, we've been seen yet. I don't even like to think about it. I'll tell you the truth. Until I get that phone call. But this book has already been approached

by a major actor in house. And I may get a little more aggressive with that. 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. Louis Ferranti. Thanks so much for being here. Thank you so much, Chris. I had a great time with you. That wraps up our summer special, but the conversation continues each day throughout the week at the Motley Fool's flagship website, fool.com.

And if you want more commentary throughout the week, check out our daily business news podcast, Market Foolery. It's our daily take on what's happening in the stock market. Market Foolery. It's rated number one on iTunes among all business news podcasts. So check it out. And while you're at it, you can get the Motley Fool's free app for your iPhone or Android smartphone. 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.