This idea that white-collar offenders weigh expected costs against expected benefits comports with notions of how executives ought to make decisions. The explanation is also rooted in the influential work of Gary Becker, the University of Chicago economist who was awarded the Nobel Prize for, among other things, mathematically modeling crime based on such trade-offs. Becker’s work contrasted with decades of prior scholarship that characterized criminals as somehow psychologically aberrant. Instead, he argued that crime could be explained by seeing criminals not as physically or psychologically different kinds of people, but rather as individuals who simply viewed the costs and benefits of criminal activity differently.
Motivated by this theory, I initially thought that if I could understand how executives thought about the costs and benefits of engaging in illicit conduct, I’d come to appreciate why they decided to act criminally. Perhaps they saw the rewards of hitting bonus targets or trading ahead of a deal as outweighing the potential repercussions. Maybe the executives just didn’t think they would get caught, so they underestimated the potential costs during their calculation.
The problem was that the more I listened, the more their criminal decisions didn’t look like carefully deliberative cost-benefit calculations at all. “At the time this was going on,” Scott London, a KPMG executive convicted of insider trading, told me, “I just never really thought about the consequences.” This executive’s remark wasn’t unique. For instance, Sam Waksal, the former CEO of ImClone Systems who shared inside information with his daughter in a scandal that would infamously also engulf Martha Stewart, was surprised that many viewed his actions as “some kind of giant byzantine idea that [he] was trying to perpetrate.” Waksal understood that calling his daughter and telling her to dump her shares was wrong. Since he knew the SEC monitors this kind of trading, his decision couldn’t possibly represent the careful reasoning of a self-made man who prided himself on his intellectual prowess. Had he actually put his mind to it, presumably he could have devised a better fraud. “I don’t know what I was thinking,” he lamented. “I wasn’t, sadly.”
If it’s bewildering that intelligent, even brilliant, people can fail to anticipate this devastation—not only to their firms, investors, and employees, but also to themselves—that’s because people assume they always act with careful thought and analysis. As a species, though, humans are incredibly poor at actually understanding their own decision-making processes. In fact, many decisions, even consequential ones, arise not from deliberation or reflection but from intuitions and gut instincts.
But if these executives relied on intuition when making their criminal decisions, why didn’t they sense the possible consequences for themselves and for others? To outsiders, the harm caused by white-collar crimes is obvious. Economically, there’s relatively little difference between embezzling money from shareholders and stealing it from their wallets. But there’s a critical difference between a physical, intimate crime like taking someone’s wallet and the white-collar variant. The perpetrators of white-collar crimes are physically, psychologically, and even temporally distant from their victims. An embezzler doesn’t have to get close to victims, touch them, or see their reactions. As a consequence, embezzling doesn’t motivate the same visceral senses as robbery.