A New Paradigm of Integrity
The Economic Model by Erhard & Jensen
Economist Michael Jensen is best known for the development of the “alpha return” concept, widely used in measuring portfolio assets returns.
At some point, M. Jensen was the most cited economist for his article on the Theory of the Firm, at the time a highly controversial piece of work, with the refusal of its publication by many top academic journals.
The article has now 20,000+ citations.
M. Jensen is also the co-founder of SSRN, the repository website collecting research articles in the field of social sciences.
More recently, he has worked passionately in the subject of Integrity, in particular on the development of a new model with tremendous applications in Finance.
This work on Integrity - in collaboration with W. Erhard - has been unnoticed by many practitioners in the Finance industry.
Hence, worth reading for those seeking to have an impact on the world of leadership.
The Paradigm Shift
People usually associate Integrity with morals & ethical values.
However, according to the new paradigm presented here, Integrity is defined as “the state of being whole, complete, unbroken, unimpaired, sound, in perfect condition”.
In this new perspective, Integrity is not good or bad.
It just is.
Like gravity, it just is.
And with such a new perspective, the model directly connects Integrity with Performance, a measurable and visible output, open to empirical testing!
The Law of Integrity
In short, the Law of Integrity states that any person or institution that is not in a state of being whole and complete, it becomes less workable, and as a consequence, has less opportunity to perform.
Again, there is no moral or ethical concept defined here.
According to the model, Integrity is seen as an "invisible force", acting on a person or institution, who needs to be aligned with it to perform well.
It is important to emphasise that Integrity is a necessary condition - although not sufficient - for high performance.
Therefore, high-performance individuals will inevitably reach a plateau and unable to fulfil their potential if they lack Integrity.
No matter how competent and intelligent they are.
One can associate the "state of being whole and complete" of a person or institution to that of a physical object.
As an example, if a bicycle is not in a state of Integrity, it is not workable and therefore, has fewer chances to perform well.
Honoring vs Keeping Your Word
But if not a moral value, what exactly determines an individual or institution to be of Integrity?
According to the model, it is about honouring your word.
It is important to emphasise that honouring your word is not the same as keeping your word.
No individual will be able to keep their word when aiming for high goals and navigating through uncertainty.
In fact, much of the lack of Integrity witness is due to it being perceived as highly inflexible but unrealistic in practice.
In contrast, one needs to stay adaptable while keeping Integrity.
Therefore, one should aim to honour the word by either keeping it or when failing to do so, acknowledge to others immediately and “clean the mess done” as mentioned in the article.
It is precisely in such moments when one is not able to keep the word that we are presented with a unique opportunity to reinforce the trust and build meaningful relationships.
In fact, the authors have counted six principles to honour your word.
The 6 Principles to Honour Your Word
Here I quote the six principles, please refer to Appendix 2 here for an extensive definition with examples:
- What You Said: Whatever you said you will do, or will not do (and in the case of do, doing it on time).
- What You Know: Whatever you know to do, or know not to do, and if it is do, doing it as you know it is meant to be done (and doing it on time), unless you have explicitly said to the contrary.
- What Is Expected of You: Whatever you are expected to do or not do – specifically, unexpressed requests of you – unless you have explicitly said you would not do it. (In the case of do, includes doing it on time.)
- What You Say Is So: Whenever you have given your word to others as to the existence of something or some state of the world, your word includes your being willing to be held accountable that the others would find your evidence makes what you have asserted valid for them.
- What You Stand For: Whether expressed in the form of a declaration made to one or more people, or to yourself, as well as what you hold yourself out to others as standing for (formally declared or not).
- Morality, Ethics and Legality: The social moral standards, the group ethical standards and the governing legal standards of right and wrong behaviour, good and bad behaviour in the society, groups and state in which I enjoy the benefits of membership are also my words (what I am expected to do) unless I have explicitly and publicly expressed my intention to not keep one or more of those standards, and I willingly bear the costs of refusing to conform to these standards (the rules of the game I am in).
Note that only in principle 6. there is a direct mention of ethics as an application of the Law of Integrity. Still, Integrity itself remains defined solely as a state of being as a whole and complete.
To emphasise principle 3. referring that what is expected of us does not have to be explicitly mentioned. Hence, wrong assumptions and neglect of situation are a typical source of lack of trust between parties and a reason for a drop in productivity.
The Integrity-Performance Paradox
The authors refer to what they call the Integrity Paradox.
This is caused due to the false perception of Integrity as being an ethical value; a superior value to have but easily forgotten in situations of pressure to deliver results.
That is most notorious in highly competitive industries such as Finance.
Due to the pressure of delivering results “no matter what”, leaders can often neglect Integrity (as an ethical value) to achieve their targets.
According to the authors, this is a Paradox.
By violating the Law of Integrity, performance is likely to drop due to a reduction of workability. The exact opposite effect that a leader aims to have.
In summary, the human prepotency to violate the Law of Integrity begins from many fallacies of the conventional understanding of Integrity, together with the challenges to unwind habits hardcoded in our mind.
The Challenge of Unwind Hardcoded Habits
Despite knowing that replacing bad habits with new ones is critical to fulfilling our potential, the truth is that it takes considerable effort to do so. Even knowing it is to our best interest.
A proliferation of bestseller books such as “Atomic Habits”, “The Power of Habit”, “Triggers” and “Switch” all reduce to the same concept.
That is, to make a change in your habits, one needs to follow extended and slowly progressive techniques with the help of subtle changes in the environment or having an external agent such as an accountability partner.
Such concepts follow the School of Behaviourism, a field in Psychology mainly developed by B.F. Skinner in the 1940s as an alternative of the Freudian School of Psychoanalysis.
Behaviourism techniques to create new habits can be summarised as:
- Physical Arousal Control (stop & breath)
- Positive & Negative Expectation Reinforcement (stop & think)
- Nudge (create subtle default choices)
- Avoidance (replace your environment)
- Association (coupling a new habit to an existing one)
Despite how motivational can be to read bestsellers, these books revolve around basic concepts of Behaviourism bundled together with excellent stories to captivate the audience to believe they too can be the hero of one such story.
Behavioural Finance 2.0
The introduction of Psychology into economic models is best known by the works of Kahneman, Tversky, Thaler, Sunstein and others, by merging the concepts of Behavioural Psychology with Economics.
Nevertheless, a common critique of Behavioural Finance is that although it labels the different human bias in the decision making, it does not give much of a solution on how to amend such bias within the context of the human condition.
Jensen & Erhard’s work has, therefore, a significant impact on Finance by addressing the core beliefs of the market participants.
Indeed, the Law of Integrity is more than an account of the relation between Integrity and Performance.
It does shape the beliefs of market participants that ultimately produce direct results on the avoidance of scandals by improving the workability of the system as a whole.
Nonetheless, market participants are, in general, highly pragmatic and analytical.
Therefore, the acceptance of the Law of Integrity as a factor in financial models remains subject to the account of empirical results.
Empirical Results
As mentioned before, the Law of Integrity can be empirically tested by measuring the performance of an individual or institution.
Although to this date the authors did not present a comprehensive analysis of such relation, they analysed many Financial scandals from the perspective of the Law of Integrity and its violations; please see chapter 5 in their article “Putting Integrity Into Finance: A Purely Positive Approach”.
The article refers as well to cases of exponential growth following the application of the Law of Integrity.
M. Jensen himself applied the Law of Integrity during the development of the research website SSRN, which, according to his account, was responsible for a 300% growth!
According to the authors, Rebook was another institution profoundly shaped by the Law of Integrity, following its application by the former CEO Paul Fireman. See here for his talk on Integrity.
Conclusion
To those aiming to become better leaders and develop meaningful relationships in their workplace, this new paradigm of Integrity can create a profound shift in their beliefs and hence, a transformation to new behaviours and performance.
Integrity is a critical element in anyone’s character.
But in highly competitive environments such as Finance, one can easily be tempted to ignore it for a moment to pursue quick wins and fast rewards.
See, for example, the report “The Street, The Bull and the Crisis: A survey of the US & UK Financial Services Industry”.
As Nobel prize winner Daniel Kahneman pointed, the natural human condition is to weigh present rewards more than possible losses in the future.
Cognitive Behavioural techniques do help an individual to change certain habits and ultimately shape their beliefs. The general criticism is that it is often a long process and requires the continuous support of an external agent or environment.
Instead, by addressing directly to the core of our beliefs, one can produce quicker and radical transformations in our behaviours and productivity.
The Law of Integrity is a step forward in such a direction.
Watch here M. Jensen video on the subject for a comprehensive and inspiring lecture on the topic.
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