A Few Apples ≠ A Barrel

Yet more unfortunate fodder for critics of financial services industry ethics. The apparent takeaway from "A Question of Trust" below (excerpted from John Authers’ 10/4/20 op-ed for Bloomberg Opinion & Advice) is that the “few bad apples” idiom often used to explain bad behavior in finance doesn’t hold water. Instead, claims the study cited by Authers, there is a “systemic pattern” of financial firms hiring bad apples. The not-at-all-subtle insinuation is that financial services firms are therefore barrels intentionally filled with rotten apples.

I don’t know how to refute this short of commissioning a competing study. But, drawing from my own experiences, I can say with confidence that every financial services firm I’ve worked for over the past 40 years has put character and integrity at the top of the list of qualities they look for in new hires. 

I’m not suggesting there aren’t crucial differences between firms, including who, how and for what purpose they hire. However, a study like this – rooted in the past behaviors of a relatively small, regional sample of aspiring financiers while they were students – does firms that prioritize what’s best for their clients a disservice when it tries to paint the entire industry with the same overly broad brush. And if the picture the study’s authors have painted actually dissuades people from seeking or trusting financial advice that they truly need, it does society a disservice as well.

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A Question of Trust

There is a widespread belief in the public at large that the people who work in finance are untrustworthy. That must rankle for the many trustworthy readers of this newsletter who work in finance, and as a worker in what is now known as the Fake News Mainstream Media, I sympathize. Trust is breaking down throughout society, and it is corrosive. 

However, if a new and fascinating piece of long-term research from a group of German academics is right, it does appear that finance is in part responsible for its bad reputation. Financial careers disproportionately attract students who are untrustworthy and, when it comes to applying for a job, financial firms do a great job of selecting the applicants who were most unreliable in their behavior at university. 

These are the findings of Trustworthiness in the Financial Industry by Andrej Gill, Matthias Heinz, Heiner Schumacher and Matthias Sutter. It’s a big survey that is worth reading, resulting from ongoing research reminiscent of the Seven Up documentaries. Seven years ago, they arranged for students at the Goethe University Frankfurt to play experimental games, with small amounts of money at stake. It was a classic measure of cooperation, where players had a choice between maximizing the total pie for everyone, or sharing less and giving themselves a chance of a greater payout. As well as playing the game, they were asked a battery of questions about their interests and career intentions. The researchers also screened for gender (women were half the sample), and intellectual ability. 

It found a strong correlation between untrustworthiness and desire to work in financial services; those most inclined to do the dirty on their partners were also the ones most inclined to pursue a career in finance. In this chart, the less students shared, the more they were attempting to do their partners out of money:

So, finance students at the main university in Germany’s financial capital turned out to have an unhealthy interest in maximizing money for themselves. The researchers returned to those students, now that most of them are established in the world of work. They discovered that those who had been most untrustworthy and held on to the most money for themselves in the sharing game had gone on to be the most likely to establish themselves in a financial job. 

There are lots of numbers and regressions in the paper — and it would have made for a fantastic TV documentary or reality show if the academics had turned up with cameras. Here is the summary of their findings:

individuals who, at the start of their studies, express a strong interest to work in the financial industry are substantially less trustworthy than individuals with other professional goals. Importantly, this relationship persists if we consider actual job market placements. Individuals who find their first job after graduation in the financial industry are significantly less trustworthy than individuals who commence their career in other industries. The former group returned on average one third less than the latter group in our experimental trust game. Thus, the financial industry does not seem to screen out less trustworthy individuals. If anything the opposite seems to be the case: Even among students who are highly motivated to work in finance after graduation, those who actually start their career in finance are significantly less trustworthy than those who work elsewhere. Similar to our main results on trustworthiness, we have also reported a negative relationship between willingness to cooperate (in a public goods game) and students’ interest in working in the financial industry.

They also conducted something of a control experiment, with students at universities in Cologne and Dusseldorf, places less likely to attract those most ambitious to work in finance. In an experiment testing how prepared students were to work in groups, those most keen to work in finance proved least willing to share. 

Finance offers the opportunity to make a lot of money, so it isn’t surprising that it attracts those most prepared to cut corners. That part of the findings isn't that concerning. What is more alarming is that financial recruiters unerringly appointed the least trustworthy people to work for them. This was the academics’ conclusion:

Given that our results suggest that financial companies themselves do not screen out less trustworthy subjects, it is unlikely that the financial industry will address this issue itself by putting more weight (in the hiring process, not only in public statements) on prosocial preferences of future employees. This suggests that policy interventions might be needed to change incentive structures in the financial industry such that it attracts more trustworthy and prosocial candidates in the future.

This brings echoes of a debate that briefly flared in 2009 and 2010, but then seemed to fade as the financial crisis disappeared into the past. Should financiers treat themselves as fiduciaries with an ongoing relationship with their clients, or approach every relationship and deal as a transactional one? Old school financiers were shocked by the frankly transactional approach investment bankers had taken when selling their own clients lousy investments in subprime credit a decade ago; a younger generation didn’t understand what the problem was. In Germany, at any rate, it looks as though the industry is recruiting more people who will treat their relationships as transactions.

Excerpted from John Authers’ 10/4/20 op-ed for Bloomberg Opinion & Advice