So what I'm going to do here is talk about
an experiment that we have conducted on honesty.
And what I mean here is a topic called experimental finance.
What is experimental finance?
It's a topic where basically we put students in a laboratory,
and these are students in psychology, in finance, or in economics, and
we studied their decision making in the laboratory.
And the study has been conducted with two colleagues of mine,
Professor Alex Wagner and Professor Carmen Tanner from the University of Zurich.
And it looks as to how people trade honesty for monetary benefits.
So the question that we're asking refers to a specific set of
ethical values which we call protected values.
So protected values in psychology are ethical values such as justice,
respect, or honesty, but which are seen as absolute or
non-tradable against monetary benefits.
In other words a person has high protected values for
honesty will not cheat in order to gain a higher pay-off.
So the question we will ask is how does this influence financial decision making?
And the experiment we're conducting is on earnings management.
So what is earnings management?
Well, Most CEOs,
most corporation engage in a certain form of earnings manipulation,
earnings management meaning that you embellish the results,
the reported income in order to meet analyst
expectations and to lower the variability of your earnings.
Of course this is not illegal.
It's permitted by accounting standards.
And here the CEO faces a trade off.
If he manages the earnings and reports a higher earning per share,
his variable compensation will increase because it depends on the stock price,
which itself depends on the earning per share.
So, what financial theory, basic financial theory will tell you is that
in such a case all the CEO should manage the earnings.
And our students or experimenters were asked
to play the role of the CEO and to decide whether or
not they should actually manage the earnings per share.
So, let me go a little bit more in detail about how we conduct such an experiment.
It was conducted at The University of Zurich.
We had about 260 students, slightly more men than women.
And they were in the fields mostly of economics and finance,
but also 40% in psychology, and 10% in other fields.
I should reassure you immediately, women are not more honest than men.
Despite what I would have liked to see, gender plays no role here.
So the decision was very easy, in each situation the student who
plays the role of a CEO has to decide whether or
not she's going to report the true earnings, $0.31 per share,
or the managed earning, $0.35 per share.
And we're going to try and explain her decision, or his decision by a set of
independent variables essentially, the cost of telling the truth.
In other words, how much bonus do I have to forego if I announce $0.31?
Then the protected values for
honesty of each participant which are measured by your questionnaire
that looks at how much they're willing to trade off honesty for
financial benefits and we also looked at the gender, the field of studies,
whether they worked part time or not other factors that could influence the results.