As you've no doubt heard by now, Wells Fargo recently received a $100 million penalty from the Consumer Financial Bureau, in response to illegal banking practices of its employees. This brought the bank's total bill for these infractions--which included secretly opening unauthorized accounts for customers--to $185 million.

You've probably also heard about the 5,300 Wells Fargo employees that have since been fired. It's still unbelievable: 5,300 employees who were allegedly involved in:

  • secretly issuing credit cards customers never asked for
  • setting up fake bank accounts that resulted in customer fees
  • creating fraudulent email accounts to sign up customers for additional services
  • actually transferring customers' money back and forth between accounts, without permission

Unfortunately, in today's business climate it's easy to imagine a few rogue employees going to the dark side. But over 5,000? How in the world did that many people get involved with such unscrupulous behavior?

The answer, according to scientific research, may surprise you.

Enter Dan Ariely. Ariely is a professor of psychology and behavioral economics at Duke University. He's the author of the New York Times bestseller, The Honest Truth About Dishonesty, and the guiding force behind the recent documentary, (Dis)Honesty: The Truth About Lies. For years, Ariely has studied the cognitive science behind exactly why we cheat.

Having recently watched the film, I couldn't help but see the parallels to the Wells Fargo scandal. Here's just a taste of the research.

People cheat more when they don't think they'll get caught.

Throughout the film, we learn about a series of studies called the Matrix experiment.

In the experiment, Ariely and his team deliver a math test to a group of participants. The test has 20 simple problems that need to be solved. Participants are told they will receive money for every question they answer correctly.

But there's a catch: There's only five minutes to answer as many questions as possible.

At the end of the five minutes, test-takers are given the solutions and instructed to count how many answers they got correct, then insert the test into a paper shredder.

But here's another catch: The shredder has been modified to only shred the sides of the page. This allows facilitators to compare the actual test results with what participants reported.

What did the researchers find?

  • On average, people reported solving six problems. In reality, they only solved four.
  • Of over 40,000 people who have taken the test, nearly 70% cheated.

So, how might this experiment explain the events at Wells Fargo?

For some reason, many of Wells Fargo's employees felt they would never get caught. Apparently, that feeling empowered them to cheat more and more.

But a dive into the data reveals another powerful fact:

Throughout the years of the Matrix experiment, Ariely and his team have only discovered about 20 "big cheaters"--people who reported to solve all 20 questions and stole around $400. In contrast, over 28,000 "little cheaters" have cumulatively stolen over $50,000.

In other words, the economic impact of little cheaters dwarfs that of bigger ones, due to sheer volume.

Which leads us to ask, if the 5,300 Wells Fargo employees who were fired are the big cheaters, what's the impact of everything that never gets discovered?

Everybody's doing it.

In another variation of the experiment, an acting student is hired to take the test along with the others. 30 seconds into the test, the actor raises his hand and says he's finished.

"Now, this is 30 seconds into the experiment; you are still on question number one," says Ariely. "There is no question in your mind that that person is cheating and the experimenter said, 'You've finished everything; you're free to go.' And you see that person taking all their amount of money and going home. What would happen to your own morality?"

"Well, lots more people cheat."

In addition to showing it's unlikely for test-takers to get caught, this experiment shows how people's behavior changes when cheating becomes "socially okay."

For example, the film tells the story of Garrett Bauer. A professional stock trader, Bauer was eventually sentenced to prison for nine years after he was found guilty for insider trading.

But while Bauer acknowledges his guilt, he also shares insight on the industry as a whole: "Insider trading information is passed around, if it's not daily, it's weekly," he says. "Everyone's trading on this stuff. There wasn't one person in my office that wasn't."

The idea that "everyone is doing it" can have profound effects on our behavior. It helps explain why so many professional sports heroes are found guilty of doping, or even why online piracy has become so prevalent in our day.

Did this phenomenon affect Wells Fargo?

A case study of 5,300 indicates it did.

Creativity has a dark side.

Francesca Gino, a behavioral scientist at Harvard Business School, worked with Ariely to explore the impact of creativity on dishonesty. In one variation of the matrix experiment, participants were first primed to "be creative," then given the test.

"What we found was that when people are in a creative mindset," explains Gino, "they're more likely to come up with lots of justifications for why what they're about to do is morally okay and is justifiable."

The potentially harmful effects of "creativity" are compounded when there's a conflict of interest. In other words, our judgment becomes skewed when money is involved.

Interestingly, Wells Fargo CEO John Stumpf is "well known in banking circles for leading the bank's efforts to cross-sell, or get customers to sign up for more and more accounts, with Wells Fargo," as reported by CNN. It appears that many in the bank even subscribed to a popular catchphrase, "Eight is great," to describe how many bank products (or accounts) customers had.

Did Stumpf's (and other company leaders') enthusiasm encourage employees to look for "creative" ways to install more accounts? Did a conflict of interest put employee goals ahead of what was best for the customer?

Shareholders should be taking a long, hard look at those questions.

The brain adapts. For better or for worse.

Tali Sharot, a cognitive neuroscientist at the University College London, shares some interesting findings on how lying affects the brain.

"Once you lie, you're more likely to lie again," Sharot says. "And probably the second lie will be bigger than the first. What we find in the brain is that, in the beginning, if you lie a little bit, there's a huge response in regions involved in emotion, such as the amygdala and the insula. The tenth time you lie, even if you lie the same amount, the response is not that high. So while lying goes up over time, the response in your brain goes down."

The reason for this for this circumstance? According to Sharot and her peers, it's based on a simple principle: The brain adapts.

She explains:

For example, if you're listening to music and it's quite low volume and I turn it up two notches, it will feel like a really big difference. But if you're listening to the radio and it's really high volume and then I put it up two notches, you won't even feel it...The same goes with dishonesty. If we're pretty much honest people, if we haven't lied and now we're telling a lie, the brain is coding this as a really big difference relative to our baseline. But if we're dishonest and we lie quite a lot, the brain doesn't respond so much. After a while, the negative value of lying, the negative feeling, is just not there so much.

Which kind of just makes you lie more and more and more.

The adaptive brain is one potential explanation for Wells Fargo employees being willing to go so far in their deception.

It just didn't feel wrong anymore.

Parting Thoughts

Interestingly, Wells Fargo's reputation in the world of finance was that of a "tightly run ship" that fared better than many competitors by avoiding much of the mortgage crisis of recent years.

Mike Mayo, a bank analyst at CLSA, felt the scandal was "way out of character for one of the cleanest banks around."

But what is most disturbing about this research, is how easy it is for practically anyone to be led down the slippery slope of dishonesty.

That's more than a theory. It's the truth.