THE BLOG

Taming the Wolves of Wall Street

02/03/2014 05:59 pm ET | Updated Apr 02, 2014

In his book Predictably Irrational Professor Daniel Ariely describes an experiment where he offers students the opportunity to cheat on tests where higher scores result in monetary awards. Ariely created two groups of students: the control set who gave their answers to a proctor and a second group that was instructed to only tell the proctor how many questions they correctly answered. This second group was divided into students who recited the Ten Commandments before taking the test and those who did not. Ariely says that those students who did not recite the Ten Commandments achieved a score 33 percent higher than the control group.

Should we have been surprised by this experiment? It's no wonder that our propensity to cut corners is heavily influenced by our environment and peers. When's the last time you stole a pencil from your place of worship? What about from the office?

On to Wall Street, where the latest sensation is Martin Scorsese's The Wolf of Wall Street. As much as the movie may tap into Scorsese's visceral mistrust of the industry and was meant to repel viewers from the field, it has turned into something of a cult classic in trading rooms around global financial centers. Some employers in Europe were reported to have sponsored employee viewings and launch parties. What's that about? One can only take a deep breath and remember that Keynes' Animal Spirits are a critical part of economic progress, the process of creative destruction, Darwinian survival of the fittest, etc. On Wall Street, whether that's in London, New York or Shanghai, the high risk/high reward culture lives.

"Wolf" dons the sheep's clothing of respectable finance, but pretty quickly rules, morality and the truth goes out the window. All investors, from individuals to sophisticated institutions, face the unhappy possibility of running into one of these wolves in the course of their investment experience. When the predators are circling, what's an investor to do?

It turns out that detecting when someone is lying is something we are learning more about and can build into our screening processes. A study that will be published in the Journal of Behavioral Finance, "Detecting lies in the financial industry: A survey of investment professionals' beliefs," gives us the first look at lying and lie detection in the financial industry. Written by Maria Hartwig of John Jay College of Criminal Justice, Brian Wallace of the New School of Social Research, and Jason Voss of CFA Institute, the paper looks at three aspects of deception: 1) beliefs about the behavioral characteristics of lying; 2) perceptions of the prevalence of lies in professional and everyday life; and 3) one's ability to distinguish between lies and truths.

The results of this are astonishing and helps explains why wolves still exist in Wall Street: investment professionals use the same body language cues that 50 years of scientific research have proven to not work. They believe -- as do many of us -- that liars avert their gaze and are fidgety. Interestingly, they also believe that lying occurs on a daily basis, and that they have above average -- and potentially overconfident -- accuracy in detecting lies. One might think that in a profession based on trust and financial transactions, that the pros have an edge, that they're more experienced and thus, better, at detecting lies. Yet, that does not appear to be the case.

Should we be concerned by these results? Yes, but I consider them an opportunity, not the end to trusting those in the financial services profession. According to an Economist Intelligence Unit study sponsored by CFA Institute, 91 percent of financial executives support the notion of aspiring to a globally recognized set of ethical standards and 67 percent of firms have raised awareness of the importance of ethical conduct by all employees. More can be done, and the industry has spoken.

The EIU study also reported that only 47 percent of executives believed that ethical standards helped their careers. This goes against the grain of CFA Institute members who every day work to raise their firm's and colleagues' awareness of appropriate ethical conduct and who want to see more progress in building a correlation between adherence to ethical standards and career progression. Whether detecting a lie, helping a colleague do the right thing or standing up for your rights as an investor, individuals can make important choices that in sum make a significant, positive impact on the future of our industry and drive away the wolves of Wall Street. CFA Institute is committed to shaping an industry that serves the greater good and giving individuals the tools they need -- whether education or a network of like-minded professionals -- to achieve this.