Dan Ariely and the black market

The most thrilling session at the Israeli Presidential Conference last week was not the panel on “Should We Wait It Out: Israel and a Changing Middle East” which featured three U.S. and Israeli ambassadors and a former head of the Mossad. It was not Yair Lapid’s speech on how integration of the haredim will produce an economic big bang nothing short of the arrival of a million Russians in Israel in the 1990s. It wasn’t even the appearance on stage of former U.S. President Bill Clinton to receive the President’s Award from Shimon Peres.

Rather it was Prof. Dan Ariely’s “master class” on what makes us honest…or not. Raised in Israel, Ariely is today a professor of psychology and behavioral economics at Duke University. The author of two New York Times bestsellers “Predictably Irrational” and “The Upside of Irrationality,” his latest book is called “The (Honest) Truth about Dishonesty.” So he knows what he’s talking about.

Ariely, repeating some of what he said in a 2009 TED Talk,  turned to the standing room only crowd in Jerusalem’s International Convention Center, and asked how many of them had told a lie in the last week? Many hands went up. How about in the previous day? Less. In the last hour? A smattering. Those who didn’t raise their hands? They were probably lying, he implied.

Ariely called dishonesty part of basic human nature, a “social lubricant” that allows us to function as people in relationships. Imagine your spouse asks “do I look fat in this?” and you answer, “No, you always look fat.” Ricky Gervais explored this in the moderately funny movie “The Invention of Lying.

Ariely’s research has found that human beings have certain thresholds for dishonest behavior. We are far more comfortable at telling “small lies” than big ones. But if you add up all the small cheating by so many people, that can result in big financial losses. He used the case of downloading movies, TV shows and music without paying. Most people would not see firing up a Torrent on the same level as creating an elaborate Ponzi scheme or wholesale tax evasion, but it adds up. (That’s one that Areily knows all too well: his own book on dishonesty has been illegally downloaded more than 20,000 times, he points out on his website.)

The thing is, we rationalize the small cheats, Ariely said. “Give me some examples,” he challenged the audience. One person suggested it depends on one’s economic situation – if you’re poorer, you’ll be more likely to pilfer the latest Adele album. “No,” Ariely replied, “we didn’t find that.” But if one perceives that their economic situation should be better, well, that’s a frequently used rationalization. So is “everyone else is doing it.” And: “I’ve already downloaded 97% of my music collection, switching over to legal downloads for the last 3% wouldn’t make any difference.”

Israelis, he pointed out – and this is contrary to the stories we tell about ourselves – don’t cheat or lie anymore than anyone else in the world; there seems to be a consistent human behavior pattern here of low level dishonesty.

Ariely said that creating harsher penalties or criminalizing dishonest behavior more often than has no impact. He cited research in a slightly different area that showed whether the death penalty is on the books or how much it is enforced in different U.S. states has almost no impact on crime levels.

His suggestion (and this may not work in “bigger” crime but certainly in small situations): if you can convince people that what they’re doing is wrong, why not let them “admit and apologize, receive amnesty… and start fresh.” The point: turning small cheaters into criminals won’t change their behavior. Giving them the chance at a clean slate might.

I was thinking about this in relation to an announcement last week by the Tax Authority in Israel that it is proposing legislation that will categorize serious cases of tax avoidance as part of the Law Prohibiting Money Laundering. Offenders, whether that involves complicated tax schemes by big business to avoid paying full taxes or is more about a small business not reporting all its transactions, would face penalties of up to ten years in prison.

The problem is not a small one in Israel. Israel’s black market (which the new legislation places both of the above categories into) in 2007 was estimated to be worth some 23% of GDP, the same level as Spain (compared to 9% and 13% in the U.S. and Britain respectively). It amounts to about NIS 40 billion ($11 million) a year. 20% of it is from small businesses.

Ariely didn’t address this issue specifically in his talk, but it’s clear he’d say that this is the wrong direction to solving the problem. Tax cheats aren’t scared by penalties. The ones who’d like to come clean need a way out of the mess they’ve gotten themselves into; a way to start again.

Whether that could ever be implemented by politicians who look for quick solutions like “Three Strikes Your Out” (the controversial law in some U.S. states that mandates prison terms for third time offenders) is debatable. But it’s worth starting the conversation. And having Ariely give a talk in a public forum in Israel’s capital brings his ideas that much closer to the halls of the Knesset.

One of his other solutions to increasing honest behavior involves swearing on the bible. In a research project, he asked college students to sign an honor code or make a statement that they wouldn’t cheat while in front of a holy text prior to commencing with final exams. Those who did so, cheated less. It even worked for atheists who don’t believe the bible has any sanctity in the first place. Even reciting the 10 Commandments helps, he said.

I’m not proposing that Israel adopt such a tactic. Can you imagine, in a country where religious-secular relations are already fraught, that we arm the tax inspectors with copies of the bible, as they make their rounds from home contractors to neighborhood convenience stores?