High Stakes Cheating

From EurekAlert, we learn that corporate executives are a bunch of cheaters, when the incentives are right:

According to the authors, "Our results demonstrate two factors substantially increase the likelihood of financial misrepresentation: extremely low performance relative to average performance in the firm's industry, and high percentages of CEO compensation in stock options."

The study also determined that approximately 1 in 10 of the financial restatements examined by the authors was linked to fraud and illegal practices. Over five years, there was a 9% likelihood that a company misrepresents its finances and is found out. The actual frequency of misrepresentation is almost certainly higher.

Stock options offer a strong incentive to raise the stock price above the strike price; indeed, the stock price must rise above the strike price for executives to profit from their options. This incentive motivates some executives to misrepresent financial outcomes to raise the stock price.

I am shocked-- shocked! In totally unrelated news, "The Weasel King" points to a story about accusations of rampant cheating at a charter school:

Now, eight former teachers assert in a 27-page report to state and local education officials that a culture of cheating exists at the school. And they say it's done at the top level.

The teachers claim:

-- Students' grades are frequently falsified.

-- Course titles don't always match the easier content tested.

-- Low-scoring students are barred from taking state-required exams in an attempt to keep them from lowering the school's scores.

-- Discipline is arbitrary and intimidating.

Just as stunning is the teachers' assertion of who is responsible for the alleged misconduct: the director, Isaac Haqq, Uprep's founder and most fervent cheerleader.

To be fair, the main lesson of the story really appears to be that crazy people should not be allowed to run schools, because, damn, Haqq comes off as a lunatic...

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According to economist Steven D. Levitt in his book Freakonomics, top executives don't just cheat when the stakes are high, they always cheat.

Levitt presents a case study done about someone who sold bagels in Washington DC on an honor system. He'd bring the bagels and people would just drop money in a box. Normally the theft rate was about 5%. According to the book, on 'management' floors, the rate was typically double the average.

Huh. Go figure.