Asset Pricing

1. There is an enormous discrepancy between returns on stocks and fixed income securities. Between 1926 and 1990, for instance, the annual real rate of return on U.S. stocks has been about 7%, while the real return on U.S. treasury bills has been less than 1%. The choice of the initial year is interesting! The Wall Street Crash of October 1929, was the most devastating stock market crash in the history of the United States. Asset Pricing 1 Monday, 03 November 20149:14 PM

2. Definition A Treasury Bill also called a T-bill, is a short-term security issued by the federal government. Treasury bills have face values ranging from $10,000 to $1 million, and sell at a discount based on current interest rates. It is a short-term obligation that is not interest bearing (it is purchased at a discount); can be traded on a discount basis for 91 days. Asset Pricing 2

3. Definition A Treasury Bond is the longest-term investment issued by the Federal Government. They have maturities between ten and thirty years and pay interest every six months until maturity. Asset Pricing 3

4. Definition Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest (equity); “he owns a controlling share of the company's stock”. In finance, in general, you can think of equity as ownership in any asset after all debts associated with that asset are paid off. Asset Pricing 4

5. Here’s what will happen if the U.S. defaults on its debt, as nearly happened in 2013. Nobody knows exactly when America would default on its bills if Congress fails to raise a cap on government borrowing. But the recent past gives a pretty good idea of how a default could unfold. Even the Treasury Department can’t know how much tax revenue will come in each day after Oct. 17, when it expects to hit its US$16.7 trillion debt ceiling. Nor can officials anticipate exact costs, such as how many people will apply for jobless benefits that week. Financial Post – Reuters 4 October 2013 Asset Pricing 5

6. Things get really spooky on Halloween (31 Oct 2013) when a US$6 billion interest payment to bond holders comes due. Financial Post – Reuters 4 October 2013 Hence the name, Halloween Bonds! The US Congress has passed a bill to reopen the federal government and approve new sovereign borrowings, ending three weeks of high drama on Capitol Hill that pushed the US to the edge of a debt default. Financial Times 17 October 2013 Asset Pricing 6

7. Did you think ethics was a county north-east of London? Is ethical banking an oxymoron (a figure of speech that combines contradictory terms)? Ethics 7

8. Islamic Banking On October 28, 2013, George Osborne, the chancellor, announced the launch of an Islamic bond plan. Mr. Osborne will on Tuesday announce plans for Britain to issue the first Islamic bond outside the Muslim world, as he seeks to turn the City of London into the “unrivalled western centre for Islamic finance”. Mr. Osborne hopes that £200m bond or sukuk will act as a catalyst for the City to become a leading player in the sharia-compliant finance market, which is worth $1tn globally. To read more on Islamic Finance, see four articles introducing Islamic banking and finance concepts written by Mark Andrews, Risk Reward Ltd. 5.8 8

9. Gemach Gemach (an abbreviation for gemilut chasadim "acts of kindness") is a Jewish free-loan fund which subscribes to both the positive Torah commandment of lending money and the Torah prohibition against charging interest on a loan. Establishing gemachs, or free-loan societies, is an old Jewish custom. When Jews arrived in America from Europe, one of the first institutions to arise in each community was a Hebrew Free Loan society. Today, there are hundreds of such organisations functioning as parts of synagogues, yeshivas, and other Jewish institutions. People donate money to the society as charity, and the society in turn lends money without interest to anyone requesting a loan (Katz 2001). 5.9 9

10. RAOP– Random Acts of Pizza An online community devoted to giving away free pizza to strangers that ask for one. It is a community within the social news and entertainment website Reddit.com. Users can submit requests for free pizza and if their story is compelling enough a fellow user might decide to send them one, “because... who doesn’t like helping out a stranger? The purpose is to have fun, eat pizza and help each other out. Together, we aim to restore faith in humanity, one slice at a time.” A typical post might sound something like this: “It’s been a long time since my mother and I have had proper food. I’ve been struggling to find any kind of work so I can supplement my mom’s social security... A real pizza would certainly lift our spirits.” See Althoff et al. 2014 (paperslides), for a fascinating study. 5.10 10

11. What About The U.K.? Charity coffee scheme launches in UK which lets drinkers donate lattes to those in need - Daily Mail - 31 March 2013 It doesn't sound as enticing as a cappuccino, flat white or latte, but a new beverage called the 'suspended coffee' is set to take cafés across the country by storm. In a concept born in Naples, Italy, caffeine drinkers not only place their own regular order, they also request a second drink for someone who cannot afford to pay for their own. 5.11 11

12. What About The U.K.? The idea, which is not just aimed at helping the homeless but those who simply find themselves out of work and broke, for example, spread to Bulgaria and, thanks to the power of social networking sites, is beginning to take off in Britain and around the world. So far, about 150 British cafes have signed up to what has become a formal scheme, while big chains like Starbucks and Costa are making positive noises about getting involved. 5.12 12

13. What About The U.K.? Bankers should behave at work as they do at home, says Archbishop Vincent Nichols, Telegraph 18-9-2012. Business leaders including Vodafone’s chief executive Vittorio Colao and Unilever’s Paul Polman joined the Archbishop of Westminster in a drive to restore business’s battered reputation for ethical behaviour. Five years on from the start of the financial crisis, and after a series of initiatives to promote “moral capitalism”, executives are concerned that little progress has been made to restore public trust. 5.13 13

14. What About The U.K.? Archbishop warns Wonga that Church wants to force it out of business, Telegraph 25-7-2013. The Archbishop of Canterbury (Most Rev. Justin Welby) has told the payday lender Wonga that he wants to force it out of business by competing with it. He has said he plans to expand the reach of credit unions, which provide small loans to their members, as part of a long-term campaign to boost competition in the banking sector. The Church of England has plans to encourage congregation members with relevant skills to volunteer at credit unions. Small, local lenders could also be invited to use church buildings and other community locations with the help of church members. The church, which claims to have a strong ethical investment policy that explicitly bans companies involved in payday lending, invests in Accel Partners, the US venture capital firm that led Wonga’s 2009 fundraising . 5.14 14

15. What About The U.K.? Faith, hope and hedge funds for Church of England By Miles Johnson, Hedge Fund Correspondent, Financial Times March 4, 2014 The Church of England is ramping up the exposure of its £6bn endowment to alternative investments such as hedge funds and private equity in a move that will cement its position as one of the UK’s largest single investors in these types of assets. The ethical investment policy was called into question last year when it was revealed that the endowment had an indirect holding in Wonga, the payday lender that had been publicly attacked by Justin Welby, Archbishop of Canterbury. Mr. Welby had said he wanted to put Wonga “out of existence” by championing credit unions. 5.15 15

16. What About The U.K.? The Telegraph – 28 July 2013 5.16 16

17. More From the Church.? A new paper published by Theos, a London-based religious think-tank, will raise hackles on the right and left alike, if only because of its title: "Just Money: How Catholic Social Teaching can Redeem Capitalism". Advocates of capitalism will certainly retort that the system has no need of redemption. The core meaning of the word redemption is something like "to secure the freedom, or the very existence, of someone or something at a price...." And as a supremely efficient instrument for resource allocation and price discovery, so the argument would go, capitalism should have no need of any external agency to purchase its right to exist. It just needs to be allowed to do its job. At the other extreme, critics on the left will retort that capitalism is so wicked that it cannot be redeemed by anything, least of all the doctrines of Catholicism. Catholicism and capitalism: Redeeming the system - The Economist - 20 Oct 2014 5.17 17

18. What About The U.K.? BBC News - Comic Relief money invested in arms and tobacco shares 10 December 2013 Millions of pounds donated to Comic Relief have been invested in funds with shares in tobacco, alcohol and arms firms, BBC Panorama has learned. The BBC has also seen evidence which suggests Save the Children censored criticism of energy firms, to avoid upsetting corporate partners. Comic Relief said it used its funds to "deliver the greatest benefits to the most vulnerable people". Save the Children said its campaigns were unaffected by any partnerships. 5.18 18

19. What About The U.K.? Capitalism is at risk of destroying itself unless bankers realise they have an obligation to create a fairer society, the Bank of England governor has warned. Mark Carney, governor of the Bank of England, said bankers had operated a “heads-I-win-tails-you-lose” system. He questioned whether traders met ethical standards and said that those who failed to meet high professional standards should face ostracism. Bank of England governor: capitalism doomed if ethics vanish | The Guardian | 28/5/2014 5.19 19

20. What About The U.K.? UK study in call to unleash $1tn for social investments - FT - 14-9-2014 A study by the international Social Impact Investment Taskforce, set up by the UK government and led by Sir Ronald Cohen, the venture capitalist, calls on governments to view “impact investment” as a vital stream of financing for domestic social programmes, as well as international development projects. Global governments need to do more to ease the way for private-sector investments that link financial returns to social benefits, with $1tn in capital waiting to be set free on the world’s problems, according to the report published on Monday (15-9-2014). 5.20 20

21. What Else? There is the scandal over banks’ attempted manipulation of the Libor (London Interbank Offered Rate) benchmark borrowing rate and mis-selling of interest rate swaps to small businesses. Currently under review (26-10-2012) are the following 16 banks; Bank of America, Bank of Tokyo Mitsubishi UFJ, Barclays, Citigroup, Credit Suisse, Deutsche Bank, HSBC , JPMorgan Chase, Lloyds Banking Group, Norinchukin Bank , Rabobank, Royal Bank of Canada, Royal Bank of Scotland, Société Générale, UBS and West LB. 5.21 21

22. What Else? Several banks have already admitted wrongdoing over the scandal, and have settled with regulators. Libor refers to the London interbank offered rate, which is an interest rate used by many banks, mortgage lenders, and others to set the price of borrowing on trillions of dollars of financial contracts. Several banks have indicated that they colluded to set the rate artificially low, which could have deprived lenders like Fannie Mae of higher profits. 5.22 22

23. What Else? BBC News - Fannie Mae sues banks for $800m over Libor - 31 October 2013 US mortgage giant Fannie Mae is suing nine banks including Barclays and Royal Bank of Scotland (RBS) over losses relating to the Libor scandal. The mortgage financer is seeking more than $800m (£499m) in damages. "Fannie Mae filed this action to recover losses it suffered as a result of the defendants' manipulation of Libor," a spokesman said. 5.23 23

24. What Else? The nine banks being sued by Fannie Mae are Barclays, RBS, Rabobank, UBS, Bank of America, Citigroup, Credit Suisse, Deutsche Bank and JP Morgan Chase. Of those, Barclays , RBS, Rabobank and UBS have previously settled with regulators over similar allegations. Barclays was fined £290m by UK and US authorities in 2012, while RBS was fined £390m earlier this year. 5.24 24

25. What Else? Rabobank received a fine of £662m from regulators earlier this week. A string of international banks have been implicated in the affair and several criminal charges have been brought against traders. It is also not the first time banks have been sued over Libor manipulation. In March, the other major US mortgage financer Freddie Mac sued more than a dozen banks. BBC News - Fannie Mae sues banks for $800m over Libor - 31 October 2013 5.25 25

26. What Else? FDIC sues banks over Libor manipulation - FT - 15 March 2014 The US Federal Deposit Insurance Corporation (FDIC) sued more than a dozen banks from Barclays to Citigroup over losses attributed to manipulation of the London interbank offered rate. The FDIC said it was acting on behalf of 38 failed banks, which it said lost money because of the way the largest international banks are alleged to have distorted the benchmark interest rate to hide their weak financial position during the crisis or to make money on derivatives trades. It is only the latest in a series of private and government lawsuits against the panel of banks, which were supposed to submit a realistic rate at which they could borrow money. Fannie Mae and Freddie Mac, the government-controlled mortgage companies, have previously sued nearly a dozen banks and the British Bankers’ Association for allegedly causing them to suffer hundreds of millions of dollars in losses. 5.26 26

27. What Else? ‘Reprehensible’ Lloyds under fire from Carney - FT - 29/7/2014 Lloyds Banking Group has been criticised for “highly reprehensible” behaviour by the Bank of England after it became the first lender to be fined for rigging rates to cut the cost of a financial crisis rescue scheme, effectively costing the taxpayer millions of pounds The state-backed bank was on Monday ordered to pay £226m as part of a settlement with US and UK authorities, including £218m of fines for manipulating key benchmark interest rates and £7.8m in compensation to the BoE for cutting the fees it paid to use the central bank’s liquidity lifeline. The total fine is less than the amounts paid by UK rivals Royal Bank of Scotland and Barclays, but the revelation the bank rigged rates to cut the cost of taxpayer-funded life support is a set back for the bank, which is trying to repair its reputation following the PPI mis-selling scandal. It is the seventh financial institution to settle as part of the global investigation into manipulation of Libor and other interbank lending rates. 5.27 27

28. What Else? Senior British banker pleads guilty to Libor rigging - Telegraph - 7 Oct 2013 Southwark Crown Court hears guilty plea from banker who cannot be named for legal reasons. A senior banker from a leading British bank has become the first person in the UK to plead guilty to criminal charges related to manipulating Libor. The person appeared at Southwark Crown Court on Friday and was released on bail pending sentencing. The court has ordered that neither the name of the individual or the bank can be disclosed. The banker, who has since left his former employer, pleaded guilty to a charge of conspiracy to defraud related to the crucial interest rate benchmark, which influences the price of hundreds of trillions of pounds of financial contracts around the world. 5.28 28

29. What Else? The acronyms proliferate! A Japanese lawmaker is querying “unnatural movements” in Tibor, the rates that underpin trillions of Yen of loans in Japan, challenging the financial regulator to get a better grip on the rate-submission process. Banks and brokerages have been investigated by regulators and watchdogs around the world for attempting to rig benchmark rates such as Libor and Euribor and Tibor. Japan’s Tibor rate comes under scrutiny - FT – 19/5/2014 5.29 29

30. What Else? Swiss and UK watchdogs step up forex investigations - FT 31/3/2014 Switzerlands competition commission has launched an investigation into eight domestic and international banks after it found indications that they co-operated to manipulate a pivotal foreign exchange rate. The fresh probe by the Wettbewerbskommission (Weko) marks the first time a regulator has publicly confirmed that it has uncovered signs of possible competition law breaches. Weko is looking at whether banks including Barclays and UBS co-operated in fixing several important currencies. This widens the number of banks under investigation, with Weko saying it is probing domestic lenders Credit Suisse, Julius Baer and Zcher Kantonalbank as well as foreign banks JPMorgan, Citigroup and Royal Bank of Scotland. Barclays makes £500m provision on forex investigation - FT - 30 Oct 2014 The bank disclosed it has set aside the sum in relation to ongoing investigations into the foreign exchange market by regulators as it reported third quarter results. 5.30 30

31. What Else? Currency-Rigging Fines Could Hit $41 Billion Globally, Citi Says - Global Association Of Risk Professionals - 20 Oct 2014 Oct. 20 (Bloomberg) - Banks could have to pay as much as $41 billion globally to settle probes into allegations traders rigged benchmarks in the currency markets, Citigroup Inc. (Citi) said today. Deutsche Bank AG is seen as probably the most impacted with a fine of as much as 5.1 billion euros ($6.5 billion), Citigroup analysts led by Kinner Lakhani (Managing Director at Citi) calculated, estimating the Frankfurt-based banks settlements could reach 10 percent of its tangible book value, or its assets worth. Using similar calculations, Barclays Plc could face as much as 3 billion pounds ($4.8 billion) in fines and UBS AG penalties of 4.3 billion Swiss francs ($4.6 billion), they wrote in a note first sent to clients on Oct. 3. The Citigroup analysts made their calculations using a Sept. 26 Reuters report. 5.31 31

32. What Else? Under-fire FCA spells out its targets for the year ahead - The Guardian - 31-3-2014 A review of how firms can prevent traders manipulating key benchmarks in a bid to stop a new Libor scandal and an investigation into how lenders treat borrowers who have fallen behind on repayments are among the City regulator's plans for the year ahead. The Financial Conduct Authority (FCA) takes over regulation of the consumer credit sector on Tuesday, and it also outlined plans for a review of how struggling borrowers are treated by the industry, and how loans are advertised. It has already signalled that it plans to get tough on the payday lenders that offer short-term loans at high interest rates, with new restrictions set to come into force in July, and it said it planned to visit the top five firms to check they are following the rules. Wheatley said: "Taking on the regulation of consumer credit is an enormous task which effectively doubles the number of firms we regulate. "Using our new power we want to tackle harm to consumers who are most at risk and our work will focus on protecting vulnerable consumers." 5.32 32

33. What Else? Wonga to pay £2.6m compensation for fake debt firm letters | The Guardian | 26-6-2014 Financial Conduct Authority (FCA) orders payday lender to compensate 45,000 customers after it sent threatening letters. Britain's best-known payday lender, Wonga, has been ordered to pay more than £2.6m compensation after it was found to have sent threatening letters to customers from non-existent law firms. The FCA said Wonga had been guilty of “unfair and misleading debt collection practices” after it emerged the lender had created fake law firms using the names of employees who in some cases still work for the company. The regulator said the firm would be compensating around 45,000 customers who received the letters, which threatened legal action over outstanding debts. 5.33 33

34. What Else? Banks look to replace payday lenders - FT - 15 July 2014 Some of Britain’s biggest banks are examining ways to launch payday-style loans as a new cap on the cost of credit is expected to drive many smaller operators out of the market. The UK’s financial regulator on Tuesday outlined the details of a proposed new price cap that will prevent the overall cost of a payday loan ever exceeding 100 per cent of the amount borrowed. The move is aimed at cleaning up an industry famed for its four-figure annual percentage rates and hefty default charges. The Financial Conduct Authority (FCA) said that from January next year, interest and fees on short-term loans must not exceed 0.8 per cent a day of the amount borrowed. That means someone borrowing £100 from a payday lender for 30 days would pay a maximum of £24 in charges. Currently the typical charge would be about £30, according to the FCA. Fees for late payment would be capped at £15 and there will be a total price limit of 100 per cent of the original loan. The FCA estimated the cap would cause payday companies to lose £420m a year – approximately 42 per cent of their £1bn combined annual revenues – and save the average consumer £193 a year. 5.34 34

35. What Else? Payday loans shaken up by competition regulator - The Guardian - 9 Oct 2014 Payday lenders will be forced to give details of their products on price comparison websites to help potential borrowers shop around under new competition rules for the sector. The Competition and Markets Authority (CMA) said payday lenders’ customers find it hard to get clear information on the cost of borrowing. Letting them compare deals online will increase competition and make it easier for new lenders to offer better prices, the CMA said. The regulator will also require payday lenders to be clearer about their fees and charges, make it easier for borrowers to shop around without hurting their credit record, improve data sharing between lenders and oblige them to give borrowers a summary of charges. 5.35 35

36. What Else? Wonga to write off £220m of loans owed by customers - FT - 2 Oct 2014 Wonga, the UK’s biggest payday lender, is looking at changing its name as part of efforts to rehabilitate its reputation after agreeing with the regulator to write off the debt of 330,000 customers. The group admitted on Thursday that under tighter lending criteria, it would not have provided loans to these people. It plans to write off £220m and eradicate interest charges for 45,000 more in a bold attempt to rehabilitate its reputation with regulators and the British public. 5.36 36

37. What Else? This has been accompanied by controversies elsewhere, such as accusations that traders and speculators are rigging the oil price. In July 2012, GlaxoSmithKline was fined $3bn for abusive practices in marketing drugs in the US. GlaxoSmithKline fined $3bn after bribing doctors to increase drugs sales - The Guardian - 3 July 2012 5.37 37

38. What Else? There is also (of course) a personal element to these events. Snorradóttir et al. (2013) considered psychological distress among surviving bank employees differently entangled in downsizing and restructuring following the financial crisis of 2008. In the banks, where all employees experienced rapid and unpredictable organizational changes, psychological distress was higher among employees most entangled in the downsizing and restructuring process. Being subjected to downsizing within their own department, salary cut, and transfer to another department, were directly related to increased psychological distress. Employees most entangled in organizational changes are the most vulnerable and should be prioritized in workplace interventions during organizational changes. 5.38 38

39. On The Other Hand Why do rich celebrities steal groceries? Why do students risk their academic careers by cheating for just a few extra marks? Ruedy  et al. (2013) may have the answer: because it feels good. Many theories of moral behaviour assume that unethical behaviour triggers negative affect. They challenge this assumption and demonstrate that unethical behaviour can trigger positive affect, which they term a “cheater’s high.” 5.39 39

40. On The Other Hand Across 6 studies, they found that even though individuals predict they will feel guilty and have increased levels of negative affect after engaging in unethical behaviour (Studies 1a and 1b), individuals who cheat on different problem-solving tasks consistently experience a more positive affect than those who do not (Studies 2–5). They find that this heightened positive affect does not depend on self-selection (Studies 3 and 4), and it is not due to the accrual of undeserved financial rewards (Study 4). 5.40 40

41. On The Other Hand Cheating is associated with feelings of self-satisfaction, and the boost in positive affect from cheating persists even when prospects for self-deception about unethical behaviour are reduced (Study 5). Their results have important implications for models of ethical decision making, moral behaviour, and self-regulatory theory. The Cheater's High - How Being Bad Feels Good - BPS Research Digest Ruedy N.E., Moore C., Gino F. and Schweitzer M.E. 2013 “The cheater's high: the unexpected affective benefits of unethical behavior” J. Pers. Soc. Psychol. 105(4) 531-548. AbstractPreprint 5.41 41

42. On The Other Hand Having less, giving more, the influence of social class on prosocial behaviour is investigated. Lower social class (or socio-economic status) is associated with fewer resources, greater exposure to threat, and a reduced sense of personal control. Given these life circumstances, one might expect lower class individuals to engage in less prosocial behaviour, prioritising self-interest over the welfare of others. It was hypothesized, by contrast, that lower class individuals orient to the welfare of others as a means to adapt to their more hostile environments and that this orientation gives rise to greater prosocial behaviour (Piff et al. 2010). 5.42 42

43. On The Other Hand Across 4 studies, lower class individuals proved to be more generous (Study 1), charitable (Study 2), trusting (Study 3), and helpful (Study 4) compared with their upper class counterparts. Mediator and moderator data showed that lower class individuals acted in a more prosocial fashion because of a greater commitment to egalitarian values and feelings of compassion (Piff et al. 2010). 5.43 43

44. On The Other Hand Social class exerts unique and pervasive psychological effects, shaping in fundamental ways how people construe the social environment and behave prosocially toward others. By behaving generously and helping those in need, lower class individuals may promote trust and cooperation from others, thus ensuring that in times of hardship, their needs will, too, be met (Piff et al. 2010). 5.44 44

45. On The Other Hand Similarly, higher social class predicts increased unethical behaviour. Seven studies using experimental and naturalistic methods reveal that upper-class individuals behave more unethically than lower-class individuals. In studies 1 and 2, upper-class individuals were more likely to break the law while driving, relative to lower-class individuals. In follow-up laboratory studies, upper-class individuals were more likely to exhibit unethical decision-making tendencies (study 3), take valued goods from others (study 4), lie in a negotiation (study 5), cheat to increase their chances of winning a prize (study 6), and endorse unethical behaviour at work (study 7) than were lower-class individuals. Mediator and moderator data demonstrated those upper-class individuals’ unethical tendencies are accounted for, in part, by their more favourable attitudes toward greed (Piff et al. 2012). 5.45 45

46. On The Other Hand In studies 1 and 2, upper-class individuals were more likely to break the law while driving, relative to lower-class individuals. These American studies equates class with affluence! Piff et al. 2012 5.46 46

47. On The Other Hand Since the recent financial crisis, regulators and the general public have focused on financial speculation as one of its potential causes. In addition to the rôles played by rating agencies and complicated financial engineering, speculative short sales have been put into question. Laypeople's moral judgments about this type of financial speculation have been investigated. short sales -The sale of a security that is not owned by the seller, or that the seller has borrowed. 5.47 47

48. On The Other Hand Sometimes cheaters do get caught. New York financier Bernie Madoff received a life sentence after pleading guilty to 11 felony counts in one of history's largest investment frauds. He admitted to a Ponzi scheme dating from the early 1990s. Federal investigators believe the fraud began as early as the mid-1980s and may have begun as far back as 1970. On 29 June 2009, 71 year old Madoff was sentenced to 150 years in prison, the maximum allowed. Unfortunately, this is just one of many stories about captains of industry and finance behaving badly with other people's money. So why do some people cheat and others don't? The classical explanation is that it's a rational choice, a cold calculation of cost and benefit. Can I get away with it, and how much can I get away with before I risk getting caught? 5.48 48

49. On The Other Hand Some scientists have begun questioning this cynical view of human ethics and suggest that the decision is much more complex than this simple calculation. Gino et al. (2009) set up an elaborate hoax to see if they could actually make people cheat - in order to illuminate the psychological forces at work in the dishonest mind. In the experiment they asked a large group of university students to solve a set of complex mathematical problems in a very short time. They made it hard enough that none could realistically solve all the problems, and they paid them for whatever ones they did solve. 5.49 49

50. On The Other Hand The mathematical exercise was just pretence for the real experiment: shortly after the students began on the mathematical problems, one of them (actually a paid actor) loudly announced to the room: “I've solved everything. What should I do?” Everyone in the room knew this was impossible, so the student-actor was a clear example of blatant cheating. He also took all of the cash, as if he had a perfect score and - very important - left without any consequences. The idea was to see how many of the students followed the cheater's example - to see if blatant dishonesty boosted cheating among students generally. And it did, dramatically. 5.50 50