Financial industry

Your cheatin' mind: How biz leaders explain away poor choices

July 19, 2012: 5:00 AM ET

People will perform all kinds of mental backflips to rationalize their choices, especially when it comes to business. We're seeing this play out again and again in the finance world.

FORTUNE -- You can hardly read the news lately without learning how someone at a big bank seemingly flouted both common sense and morality in the effort to make a buck.

A quick sample: Executives from British bank HSBC testified before the Senate this Tuesday over allegations that in 2007, the bank enabled Mexican drug cartel leaders and terrorists in the Middle East to fund illegal activities. Also on Tuesday, the Federal Reserve and the Commodity Futures Trading Commission testified before Congress about how big global banks potentially manipulated a market rate called Libor between 2005 and 2010 to make their financial situations appear better than they were. Barclays (BCS) was the first target in the investigation, having settled with regulators to the tune of $450 million last month. Citigroup (C) executive Brian Stoker is facing allegations in federal court in Manhattan that he sold collateralized debt obligations to clients despite knowing that Citi was planning to bet against those same assets. Last week, J.P. Morgan (JPM) told regulators that an internal investigation into a $5.8 billion trading loss turned up that the traders might have tried to cover up their mistakes.

Unfortunately, the list goes on. The press is bad. Given the fallout of fines and ugly coverage, why would so many of these people try to game the system? To understand the big-picture motives, you need to get inside the mind of a cheater.

Rationalizing poor choices

First, it's safe to say that most people who make unethical choices think of themselves as good people, says David Mayer, a management professor at the University of Michigan's Ross School of Business. "But we humans have found ways to not feel so bad about it when we behave a certain way -- we basically disconnect these self sanctions."

People will perform all kinds of mental backflips to rationalize their choices, especially when it comes to business. "We're pretty good at segmenting our lives into different areas," says Mayer. "If you were to go to church or temple, that's a moral domain. People tend to not think about business as a moral domain."

MORE: Why the Wells Fargo settlement settles nothing

In a big business, there's often considerable distance between the people who are making questionable choices and the people those choices hurt. HSBC, for example, allegedly ignored signs that people involved in drug cartels were using its system. "It's not like they were watching someone being shot by a drug cartel," says Mayer. "It's totally depersonalized, you're just looking at numbers," Mayer says.

Leaders, like most people, generally prioritize the people who are closest to them. That can make it difficult to think about the wider reach of unethical choices. In their minds, "They're almost performing altruistic behavior, because they're protecting the jobs around them, and perhaps the survivability of the corporation," says Barry Staw, a professor of leadership and communication at the University of California, Berkeley. More

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