(By Joseph W. Koletar) When someone hits the lottery by blind luck, peace and happiness spread throughout the land, right?

Perhaps not. Perhaps all that happens is that the fires of jealousy get fueled.

The Wall Street Journal of February 17, 2016 (page A-3), reported some interesting “collateral damage:”

“Losers in Lottery: Neighbors of Winners,” by Ben Leubsdorf

According to the article, research by the Federal Reserve Bank of Philadelphia found a significant increase in bankruptcies among neighbors of new lottery winners. Their theory is such people felt a need to “keep up” with their newly-wealthy neighbors and became financially stressed by the effort. The research was based on a study of a Canadian Province, and detailed the actions of winners and their neighbors over a period of ten years. The study eliminated areas with more than one lottery winner, and also lottery winners who later declared bankruptcy themselves. (Such things appear to actually happen.) Researchers chose to refer to this phenomenon as “…the link between income inequality and financial distress.”

All of this is fine and good, but what does it tell us about “C” suite fraud? What can the two disparate situations possibly have in common? Our hypothesis is simple – it depends on how you define “neighbor.” In the case of the lottery winners it was physical proximity. Our approach, to the best of our knowledge, is unique – what if one were to define “neighbors” as persons of similar hierarchical and status dimensions? By eliminating physical proximity we expand the concept of “neighborhood” to the world.

CEOs and CFOs know these “neighbors” very well: they travel in the same circles; they attend the same conferences; they may have gone to the same, or competing, schools; they often sit on the same boards; they compete with each other in terms of business and public status; and some put a premium on “winning.” Unfortunately, the latter desire/compulsion can lead to misconduct of the first rank. Early in our co-authored book, A.B.C.’s of Behavioral Forensics, listed prominently among the fraud perpetrator’s motives is, “Status: ‘Keeping up with the Joneses, fame, or fear of losing status.” (p.5)

Such considerations are hardly new. The economist Frederick Herzberg discussed, over fifty years ago, his theory that money has both an absolute and a relative value. Its absolute value is simple – five dollars is more than one dollar. In terms of relative value a purely psychological value emerges. A short example may suffice to illustrate this dynamic:

Bob takes a new job for $50,000 and is pleased with the salary, until he finds out Sue got an identical job in the same company at the same time for a starting salary of $60,000. At this point Bob becomes unhappy with the same $50,000 salary that once pleased him. It is the “law of social comparisons” at work, first expounded by social psychologist Leon Festinger in 1954, that drives competitive behavior with one’s peers (or neighbors, for that matter).

Do “C Suite” executives behave in this manner? Recent history suggests the answer is “yes.” From Bernie Madoff (serving his 150-year sentence for perpetrating a massive Ponzi scheme) to Jeff Skilling (former CEO of Enron now in jail) to countless others we see again and again the behavior of already wealthy people trying to gild the financial lily by any means necessary. It seems to be a primal need that defies logical explanation.

The eternal question is “Why?” Shakespeare wrote that “comparisons are odorous” (Much Ado About Nothing, Act 3, Scene 5), but Stanford psychologist Festinger surmised that the need to compare oneself with others is critically important in the development of the self-concept and self-identity, for we learn by looking at ourselves in relation to others. It is clear that the emerging specialty field of behavioral forensics, drawing on insights from behavioral sciences such as psychology, sociology, and anthropology, can shed much light on why fraud perpetrators act in the way they do.

© 2016
Joseph W. Koletar

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of A.B.C.s of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D. These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud. Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.

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