How Behavioral Science Can Help Unlock the Mystery of Deviant Companies Like FTX.
This will help you better understand how Sam Bankman-Fried was able to fool so many people for so long.
All the light has not yet been shed on the bankruptcy of FTX and the actions of its founder Samuel Bankman-Fried, whose fortune estimated a few days ago at 17 billion has now fallen to zero.
Was it a Ponzi scheme similar to Bernard Madoff's? Was it a manipulation of accounts to inflate profits and hide losses, like Enron?
In any case, the spectacular collapse of a highly successful company, in an environment scrutinized by many observers where controls abound, is not surprising.
It is possible that a handful of criminally minded individuals would agree to run a scam of this magnitude. But in all of the cases mentioned, it takes much broader cooperation to make it work. It includes people who have the desire to do the right thing and are committed to the value of honesty.
How can we explain the fact that a large number of people, who themselves want to do the right thing, end up lending a hand, each at their level, to the deviance of a company?
Behavioral sciences shed light on this apparent paradox. The existence of a social effect in human judgment or action has long been demonstrated by the famous experiments of Asch (group conformity) or Milgram (submission to authority). Every group has specific customs, beliefs, and a set of norms from which it is risky to deviate. The threat of social stigmatization can be enough to paralyze.
The relevance of action takes second place in its consistency with the social norm. Keynes writes, “worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.”
Goffman's work on social role theory has shown that we all assume certain roles in society that determine socially legitimate behavior and speech. In the absence of a clear indication of which position is socially approved or less risky, Schelling's notion of focal point shows that we will tend to adopt the position we think is most likely to be the position of others.
In business, the desire to appear in society, to conform to the norms of the group, and the herd instinct, are all serious causes of this anxiety “not to deviate” from the expected behavior. The consequence in a context of uncertainty is a “reserve effect”: everyone will wait for a signal of the attitude to adopt in public or, if he cannot wait, will conform to the idea he has of the expected behavior.
Researchers have thus proposed the concept of “informational cascade” to describe these situations where it seems optimal, for an individual who has observed the actions of others, to follow their behavior without taking into account his information or beliefs. This explains why groups can massively deviate, in total contradiction with each other's opinions.
This is the mechanism that is at work in speculative bubbles. It is also the one that explains totalitarian experiences: at the time of the Eichmann trial, Arendt had described how the discrepancy between publicly accepted representations and personal convictions made it possible to understand the apparently incomprehensible existence of these thousands of “indifferent” killers, who were otherwise good fathers and good husbands.
This is a sad observation that should encourage vigilance: a very limited number of determined people placed at the head of an organization can be enough to lead it into the most serious deviances.
