Psychology

1. Psychology of Fraud Toby Groves

6. Neurocriminology The Biological Link to Crime • Twin and adoption studies-General support for hereditary basis for crime • Landmark Study-Mednick (1984) • 14,427 Non-familial adoptions analyzed • Results: • Biological and adoptive parents with no convictions= 13.5% of children had convictions • Adoptive have convictions/Biological do not=14.7% of children had convictions • Biological have convictions/Adoptive do not=20% of children had convictions • Both Biological and Adoptive have convictions=24.5% of children had convictions • Less than 5% of individuals were chronic offenders • Indicates stronger biological influence, but that environment is factor as well. • Mednick, S. (1984), Raine, A. (2013)

7. Neurocriminology The Biological Link to Crime • Lower Function in Prefrontal Cortex for Murderers Limited Function Normal Function Raine, A. (2013)

8. Neurocriminology The Biological Link to Crime • Significant findings • Amygdala 18% smaller in group considered psychopaths • Believed to be genetic susceptibility coupled with environmental triggers • Monoamine Oxidase A (Enzyme) combined with early child abuse associated with smaller amygdala volume (emotional center of brain) • Brain plasticity • Early development can have profound influences on brain activity • Moral decision making elicits different neural responses in psychopathic individuals Caspi, A. & Moffitt, T. (2002); Yang, Y., Schug, R. & Raine, A. (2009)

9. Psychopathy • Not a diagnosable mental disorder per the American Psychiatric Association • Psychopathology-Science of disease of the human mind • A Psychopathic Personality is known by the following traits: • Amoral and anti-social behavior • Inability to develop meaningful/lasting relationships • Extreme egocentricity • Absence of empathy • Known to be “Emotionally Deaf” • Most accepted test for Psychopathy is the Psychopathy Checklist (Dr. Robert Hare)

10. Psychopathy test- Score 0 if it does not apply to you, score 1 if it somewhat applies, score 2 if it fully applies to you. Please total your score at the end of the test. 1. Glibness and superficial charm  0 1 2– smooth-talking, engaging and slick.2. Grandiose self-worth  0 1 2– greatly inflated idea of one’s abilities and self-esteem, arrogance and a sense of superiority.3. Pathological lying  0 1 2– shrewd, crafty, sly and clever when moderate; deceptive, deceitful, underhanded and unscrupulous when high.4. Cunning/manipulative  0 1 2– uses deceit and deception to cheat others for personal gain.

11. 5. Lack of remorse or guilt  0 1 2- no feelings or concern for losses, pain and suffering of others, coldhearted and unempathic.6. Shallow affect / emotional poverty  0 1 2– limited range or depth of feelings; interpersonal coldness.7. Callous/lack of empathy  0 1 2– a lack of feelings toward others; cold, contemptuous and inconsiderate.8. Fails to accept responsibility for own actions  0 1 2– denial of responsibility and an attempt to manipulate others through this.

12. 9. Needs stimulation/prone to boredom  0 1 2– an excessive need for new, exciting stimulation and risk-taking.10. Parasitic lifestyle  0 1 2– Intentional, manipulative, selfish and exploitative financial dependence on others.11. Poor behavioral controls  0 1 2– expressions of negative feelings, verbal abuse and inappropriate expressions of anger. 12. No realistic long-term goals  0 1 2– inability or constant failure to develop and accomplish long-term plans.

13. 13. Impulsiveness  0 1 2– behaviors lacking reflection or planning and done without considering consequences.14. Irresponsible  0 1 2– repeated failure to fulfill or honor commitments and obligations.15. Juvenile delinquency  0 1 2– criminal behavioral problems between the ages of 13-18.16. Early behavior problems  0 1 2– a variety of dysfunctional and unacceptable behaviors before age thirteen.

14. 17. Revocation of Conditional Release  0 1 2– Violating probation or other conditional release because of technicalities.18. Promiscuity  0 1 2– brief, superficial relations, numerous affairs and an indiscriminate choice of sexual partners.19. Many short-term relationships  0 1 2– lack of commitment to a long-term relationship.20. Criminal versatility  0 1 2– diversity of criminal offenses, whether or not the individual has been arrested or convicted.

15. Common Steps of a Psychopath in an Organization • Organizational Entry (Charming the interviewer) • Assessment (Gauging utility of organizational members, establishing a network, charm people in power • Manipulation (Spread disinformation to disparage others and enhance own image) • Confrontation (Abandon pawns that are no longer useful) • Ascension (Reach upper echelon at company and abandon those who facilitated his rise to power (Ramamoorti, 2008)

16. Behavioral Profiling • FBI Behavioral Analysis Unit (BAU)/ White Collar Crime • Focus on: • Developing behavioral profiles based by comparing details of the crime with behavioral details of the offender • “investigation phase” –after a crime has occurred • Recognition of people likely to cooperate/act as informants • Conflicting assessments as to effectiveness

17. Behavioral Profiling • Why not use profiling before a crime occurs? • FBI uses known data from a crime to draw correlations with past events and infer characteristics • This is much different than inferring data for a crime that hasn’t occurred and for which details are unavailable • Even for experts, predicting behavior is statistically little better than chance

18. Why does this matter? • We subconsciously assign tremendous weight to our assumed outcomes and automatic character assessments • This assessment causes profound biases our perceptions • Colors our judgment • Results in automatic assumptions and predictions • Causes susceptibility to seek incorrect subliminal information (Dan Ariely, Duke University)

21. Adoption study of 14,427 adoptions-Most individuals that committed crimes had no genetic history 13.5% versus 20% convictions rate means high biological correlation But, consider If 95% of biological parents had no convictions 14,427 X .95=13,705 X 13.5% = 1,850 And 5% of biological parents had convictions 14,427 X .05=721 X 20% = 144

22. Nearly 90% of those convicted of occupational fraud never Charged previously And more than 90% of those not previously charged had also never been reprimanded 2012 ACFE Report to the Nations

23. Study: Auditor Prioritization • Fundamental Attribution Error- • A cognitive bias of over emphasizing personality characteristics and under-emphasizing situational awareness. Apostelou (2001) ; Wilks and Zimbelman (2004)

24. Sticky First Impressions Unlimited exposure times were highly correlated with briefest exposure times Ekman & O’Sullivan (1991)

25. Distinguishing Truth from Deception Ekman & O’Sullivan (1991)

26. Prediction Challenges • A small percent of the population may be predictable, while the majority of crime is committed by those who aren’t • Unlike some violent offenders-prefrontal cortex activity can look normal in “financial” psychopaths • Subtle contextual differences change decision processes making behavioral predictions difficult for “normal” population (Johns, 2006) (Dan Ariely, Duke University)

27. Cheating Research The 18,000 “little” cheaters stole $36,000 The 12 “BIG” cheaters stole $150 30,000 test takers 18,000 cheat a little 12 cheat a lot (Dan Ariely, Duke University)

28. Neuroscience and Decision Making • Instead of a conscious reasoning process to arrive at a judgment • Usually have immediate and sub-conscious intuition • Followed by conscious reasoning to support that intuition • Logic versus emotion in decision making (J. Greene research) Haidt (2001)

29. Stability of Moral Position Study: “Large scale governmental surveillance of e-mail and internet traffic ought to be forbidden as a means to combat international crime and terrorism” Hall, L. Lund University

30. Stability of Moral Position Study: “Large scale governmental surveillance of e-mail and internet traffic ought to be permitted as a means to combat international crime and terrorism” 69% of people gave well constructed arguments for one of two altered statements after taking a moral position. Hall, L. Lund University

31. Economic Theory Assumption-Theory of Expected Utility: Assumes we will follow a logical process, weighing the expected gain from a crime against the likelihood of getting caught and severity of punishment. Does cheating increase/decrease relative to: The amount that can be stolen? The likelihood of getting away with it? The severity of the punishment? The research says…

32. The Precipice of Fraud • Situational factors: • Research shows when factors like these… • Meeting debt covenants • Meeting sales projections • A surprise loss, legal problem, or business challenge • A severe personal challenge • Pressure for aggressive accounting treatment of any kind (starts a cycle) • Are mixed with factors like these…

33. The Precipice of Fraud Over-optimism- A bias that causes a person to believe that they are less at risk of experiencing a negative event compared to others. Overconfidence- An over-estimation of one’s abilities or exhibiting greater certainty than warranted by existing circumstances. Loss Aversion- The motivation to avoid losing what you already have is even stronger than the motivation for additional gains. Framing errors-(Exercises)

34. The Precipice of Fraud Framing Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimate of the consequences of the program are as follows:

35. The Precipice of Fraud • Framing • Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimate of the consequences of the program are as follows: • If program A is adopted, 200 people will be saved. • If program B is adopted, there is a 1/3rd probability that 600 people will be saved, and a 2/3rds probability that no people will be saved. • If program Cis adopted, 400 people will die. (Same as A) • If program Dis adopted, there is a 1/3rd probability that nobody will die, and a 2/3rds probability that 600 people will die. (Same as B)

36. Group Psychology Like Taking Candy….. • Do we Cheat More in Groups than as Individuals? • Study observed 1,300 children visiting 27 homes around Seattle • Some alone-some in groups • Some asked names/where they lived-Some were not • Children were asked to take one piece of candy then left alone as hidden observers watched • Children in groups took the most candy • In groups and not asked identity took even more • Individuals asked identity were least likely to cheat/mirror (Beaman et al. 1979; Diener et al., 1976)

37. Group Psychology The Science Behind Collusion • The overwhelming power of belonging • “Need to belong”-Affiliation with similar others is a fundamental human motive. • Pervasive drive to form and maintain relationships (Baumeister & Levy, 1995) • Social connection is crucial for mental and physical well being • Once in a group, these motives shape our perceptions and interpretations • Threat of breaking a relationship causes great stress • External threats trigger fear and strong motivation to affiliate (Schacter, 1959) • Especially with others who face a similar threat

38. Group Psychology The Science Behind Collusion • Research studies and real life repeatedly show the desire to affiliate with those facing similar threats • Provides emotional support and cognitive clarity • Hospital patients waiting for open heart surgery prefer to wait with those who have been through the surgery or those also waiting (Kulik & Mahler, 1989). • Strangers band together after natural disasters or terrorist attacks. • Study participants expecting painful shocks chose to wait with other nervous participants (Schacter, 1959)

39. Group Psychology The Science Behind Collusion • Group Assimilation • Norms-Unspoken rules of conduct • Informal rules (culture) more powerful than formal rules • A sense of what it means to be a good group member • Figuring out the rules takes time and causes anxiety (investment) • Once learned- breaking group norms is difficult and even traumatic from fear of social consequences • Studies show that co-workers are very reluctant to report unethical behavior of others on their work teams (Benoit Monin, 2008). • Individuals that go against group norms are strongly disliked by fellow participants-even when the norm was immoral and not personally accepted by other participants (rejection) • People fear being divisive (Whistleblowers) (2008 financial collapse)

40. Group Psychology The Science Behind Collusion • Group Cohesiveness-Forces that push members closer together • More group related pride • Engage in frequent and sometimes intense interactions • Strong similarity features-similar backgrounds-homogenous • Breaking group norms is especially difficult in highly cohesive groups • Conformity bias-The power that pushes us to conform to our reference group.

42. Group Psychology The Science Behind Collusion • Ingroups and Outgroups • Strongly favor our ingroup -During conflict or unstable situations, opposing groups are feared • Outgroups perceived as foreign • Dehumanize outgroups-lack normal human qualities • Dehumanization and “Us” versus “Them” =easier to attack outgroup members (used in military conflict, politics) • Use behavior from ingroup as a cue (Ariely)

43. Group Psychology The Science Behind Collusion • GroupThink-The tendency to seek concurrence among group members creating a dangerous bias in decision making like a social disease (Janis, 1984)-more likely in: • Highly cohesive groups that reject deviant opinions and outgroup views (“US” verus “THEM”) • Groups with strong leader that lacks procedures to review decisions • Groups with similar backgrounds • Stressful situations • Under stress/ambiguity, urgency overrides accuracy and the reassuring support of other group members becomes highly desirable

44. Group Psychology The Science Behind Collusion • Groupthink leads to Biased Sampling • Tendency to spend more time discussing shared information-information already known by most of the group rather than information only known by a few • People tend to share knowledge most likely to be known/accepted • Failing to consider important information that is not common knowledge • Leads to decisions based on flawed or incomplete information (Stasser, G., 1992; Stasser & Titus, 2003)

45. Group Psychology The Science Behind Collusion • Research into NASA 1986 Space Shuttle Challenger Disaster • VP of engineering objected to launch due to cold weather • Cause “O”-rings in rocket boosters to fail • Needing unanimous vote to launch, manager told VP to “take off your engineer hat and put on your management hat”. (Framing) • The pressure worked and the VP changed his vote-sealing the tragic fate of the Challenger and her crew • Biased Sampling-those who ultimately made decision to launch we not aware of all relevant information about risk of low temperatures

46. Group Psychology The Science Behind Collusion • Research into February 1, 2003 NASA Space Shuttle Columbia Disaster • Team of engineers review video of foam breaking off and hitting left wing • May have damaged heat-shielding tiles • Engineer Rodney Rocha makes more than 6 requests to seek images from spy satellites/powerful telescopes to review damage prior to reentry • His manager says he “refuses to be a Chicken Little” and Flight Director sends chilling e-mail to Rocha saying further investigation is a “dead issue”. • Space Shuttle Columbia disintegrates on reentry (Glanz & Schwartz, 2003)

47. Group Psychology The Science Behind Collusion • Research into 1961 Bay of Pigs failure by President Kennedy’s “best and brightest” • President Kennedy assembles one of most impressive groups of advisors in U.S. history • Plan to invade Cuba in effort to spark a people’s revolt • Plan reliant on invaders receiving support from Cuban Guerillas hiding in mountains • Mountains were 80 miles away from landing spot and separated by swamp • Invaders massacred and Cuba aligns with Russia • President Kennedy “How could we have been so stupid?”

48. Group Psychology The Science Behind Collusion • Famous Examples of Groupthink • Research into the Manipulation of Libor • Eurodollar contract starts trading-early 80’s-at CME (direction of interest rates) • CME did own calculations, surveying banks to determine benchmark • To make product more popular-CME suggests to CFTC to use BBA Libor-more commonly used rate-“Made sense”-other swaps used Libor • Marcy Engel (Lawyer with Solomon Bros) writes to CFTC-since banks that set rates in London can also take position in CME contract-”might provide an opportunity for manipulation”-”bank might be tempted to adjust its bids to benefit its own positions” • CFTC Division of Economic Analysis- Libor “does not appear readily susceptible to manipulation” • Becomes “business as usual” to manipulate Libor at Barclays Bank

49. Group Psychology The Science Behind Collusion • Reducing Groupthink • Unspoken norms more powerful than written codes • Reduce group pressure to conform by encouraging criticism • Leaders should NOT take a strong stand early in discussions • Establish a norm of critical review-”second chance” meetings to reconsider • Discourage the search for concurrence • Consult with outsiders

50. Group Psychology The Science Behind Collusion • Do members of groups “average” their views or tend to the extremes? • Group Polarization-Presence of others triggers Dominant Response • The presence of others creates physiological arousal-energizes behavior. Happens in all animals, especially similar species-more similar=greater effect (Zajonc, R. 1965, 1980) • Increased arousal enhances tendency to perform “Dominant Response”-that which is automatic. • Performance and judgment quality depends on task • Easy task=dominant response usually successful • Unfamiliar or complex task=dominant response is often incorrect (Lambert et al., 2003;Perk & Catrambone, 2007)