Introduction

• We all tend to assume that our own actions are the results of a careful analysis of the situation we find ourselves in. However, we also assume that everybody else’s actions are the result of their inherent attitudes. This is called the fundamental attribution error. It means that we shouldn’t be so fast to judge others, since we can’t be sure that we would act differently if we found ourselves in their shoes.

• Back in 1971, Zimbardo (a psychology prof) put willing mentally and physically sound volunteers into a mock prison environment. People were randomly assigned to be guards or prisoners. Despite this random allocation of roles, the guards abused the prisoners, and the prisoners became zombie-like. The experiment was halted after just six days.

• Milgram (another psychology prof) was horrified to find that over 60% of people were willing to subject others to a potentially lethal electric shock merely at the instruction of a man in a white coat with a clipboard. Such is our obedience to authority.

• Both experiments are classic evidence for the importance of understanding context on predicting behaviour. The factors that lead to increased risk of turning bad are explored inside.

• From a corporate governance point of view, the importance of situational factors should lead us to be on our guard for situations and incentives that could give rise to bad behaviour. If found guilty, the men now standing trial for misbehaviour during the bubble years are unlikely to be the last corporate wrong-doers. Investors should note that academic work has shown that good governance does pay.

By Dr James Montier