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Business culture and dishonesty in the banking industry

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Trust in others' honesty is a key component of the long-term performance of firms, industries, and even whole countries. However, in recent years, numerous scandals involving fraud have undermined confidence in the financial industry. Contemporary commentators have attributed these scandals to the financial sector's business culture, but no scientific evidence supports this claim. Here we show that employees of a large, international bank behave, on average, honestly in a control condition. However, when their professional identity as bank employees is rendered salient, a significant proportion of them become dishonest. This effect is specific to bank employees because control experiments with employees from other industries and with students show that they do not become more dishonest when their professional identity or bank-related items are rendered salient. Our results thus suggest that the prevailing business culture in the banking industry weakens and undermines the honesty norm, implying that measures to re-establish an honest culture are very important.
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LETTER doi:10.1038/nature13977
Business culture and dishonesty in the banking
industry
Alain Cohn
1
*, Ernst Fehr
1
& Michel Andre
´Mare
´chal
1
*
Trust in others’ honesty is a key component of the long-term perfor-
mance of firms, industries, and even whole countries
1–4
. However, in
recent years, numerous scandals involving fraud have undermined
confidence in the financial industry
5–7
. Contemporary commenta-
tors have attributed these scandals to the financial sector’s business
culture
8–10
, but no scientific evidence supports this claim. Here we
show that employees of a large, international bank behave, on aver-
age, honestly in a control condition. However, when their profes-
sional identity as bank employees is rendered salient, a significant
proportion of them become dishonest. This effect is specific to bank
employees because control experiments with employees from other
industries and withstudents show that they do not become more dis-
honestwhen their professionalidentity or bank-related items areren-
dered salient. Our results thus suggest that the prevailing business
culture in the banking industry weakens and undermines the hon-
esty norm, implying that measures to re-establish an honest culture
are very important.
Banks and financial markets are fundamental pillars of every advanced
economy, and banking services are a key requirement for economic
development
11
. The recent wave of problematic financial practices and
scandals involving fraud, however, has caused serious economic dam-
age and may threaten the stability and reputation of banks and the fi-
nancial sector as a whole. For example, the practices of the two rogue
traders Jero
ˆme Kerviel and Kweku Adoboli resulted in total damages
of almost US$10 billion
5
. Other examples, such as the manipulation of
key interest rates (for example, LIBOR
6
), as well as several tax evasion
affairs
12
, have led to a dramatic loss of reputation and a crisis of trust
7
in the financial sector.
Policy makers are increasingly concerned about these scandals, and
often attribute problems to the prevailing business culture (that is, the
norms and informal rules) in the banking industry
8
, which is thought
to toleratedishonest behaviours instead of prohibiting them.Lord Adair
Turner, whowas chairman of the UK Financial ServicesAuthority from
2008 to 2013, argued that ‘‘bank executives face the challenge of setting
clearly from the top a culture which tells people that there are things
they shouldn’t do, even if they are legal, even if they are profitable and
even if it is highly likely that the supervisor will never spot them’’
10
.
Despite its policy relevance, sound empirical evidence on the culture
in the banking industry is lacking. Identifying the effects of business
culture poses several challenges. Simply comparing the prevalence of
dishonesty among bank employees and other professionals can be mis-
leading. More honest people may select different professions than less
honest people, which makes it difficult to disentangle cultural and se-
lection effects. Moreover, professional groups vary along many unobserv-
able dimensions. For example, differences in honesty could be related
to differences in personal financial situations across professions. Fail-
ing to account for such dimensions could result in spurious correlations.
We take a novel approach that is inspired by theeconomic theory of
identity
13
, which proposes that individuals have multiplesocial identit-
ies based on, for example, gender, ethnicity or profession. Identities are
associated with specific social norms prescribing permissible behaviours.
Which identity and associated norms are behaviourally relevant depends
on the relative weight an individual attributes to an identity. In a given
situation, behaviour is shifted towards those norms that are associated
with the more salient identity
14–17
. Thus, if the banking culture favours
dishonest behaviours, it should bepossible to trigger dishonestyin bank
employees by rendering their professional identity salient
14
.
To study whether the banking culture causes dishonesty, we recruited
128 bank employees from a large, international bank for an experiment.
We randomly assigned the employees either to a treatment condition
that increased the salience of their professional identity or to a control
condition in which their professional identity was not made salient.
Random assignment ensures that subjects in thetwo conditions are sta-
tistically indistinguishable in all observable and unobservable charac-
teristics. This circumvents problems related to selection and spurious
correlation.
On average, the bank employees had 11.5 years of experience in the
banking industry. Roughly half of them worked in a core business unit,
that is, as private bankers, asset managers, traders or investment man-
agers. The others came from one of the support units (for example, risk
or human resources management). Subjects participated in a short online
survey. After answering some filler questions about subjective wellbeing,
subjects in the professional identity condition were asked seven questions
about their professional background (for example, ‘‘At which bank are
you presently employed?’’ or ‘‘What is your function at this bank?’’).
Those in the control condition were asked seven questions that were
unrelated to their profession (for example, ‘‘How many hours per week
do you watch television on average?’’).
After the priming questions, all subjects anonymously performed a
coin tossing task that has beenshown to reliably measure dishonest be-
haviour in an unobtrusive way
18–20
and to predict rule violation outside
the laboratory
17
. The rules required subjects to take any coin, toss it ten
times, andreport the outcomes online. For each coin tossthey could win
an amount equalto approximately US$20(as opposed to $0) depending
on whether they reported ‘heads’ or ‘tails’. Subjects knew in advance
whether heads or tails would yield the monetary payoff for a specific
coin toss. Moreover, subjects were informed that their earnings would
only be paid out if they were higher than or equal to those of a ran-
domly drawn subject from a pilot study. We introduced this element
to mimic the competitive nature of the banking profession
9
. Given that
the maximum payoff is approximately $200, subjects faced a considerable
incentive to cheat by misreporting the outcomes of their coin tosses.
Because subjects were unobserved during the task and because they could
hide behind chance, it is impossible to identify who cheated. However,
we can detect dishonesty at the group level by comparing the reported
fraction of successful outcomes with the 50% benchmark implied by
honest reporting. Using similar paradigms, researchers found that in
situations in which cheating cannot be detected, many individuals do
not take full advantage of cheating opportunities
18–22
. This phenom-
enon is typically attributed to the presence of an honesty norm
4,23
that
causes psychological costs when one cheats, such as the loss of one’s
positive self-image
21
.
*These authors contributed equally to this work.
1
Department of Economics, University of Zurich, 8006 Zurich, Switzerland.
86 | NATURE | VOL 516 | 4 DECEMBER 2014
Macmillan Publishers Limited. All rights reserved
©2014
We conducted a manipulation check in which subjects converted
word fragments into meaningful words. For example, they could com-
plete the wordfragment ‘‘_ _ oker’’ withthe bank-related word‘‘broker’’
or an unrelated word such as ‘‘smoker’’. This allowed us to test whether
the treatment increased professionalidentity salience. The frequencyof
bank-relatedwords in the professional identitycondition was increased
by 40%, from 26% in the control to 36% (P50.035, rank-sum test),
indicating that our manipulation was successful.
Figure 1ashows the binomial distribution of earnings in the cointoss-
ing task that would result if everyone behaved honestly, and the empir-
ical distribution from the control condition. Both distributions closely
overlap, suggesting that the control groupbehaved mostly honestly. On
average, they reported successful coin flips in 51.6% of the cases, which
is not significantly different from 50% (95% confidence interval: 48%,
56%). By contrast, thebank employees were substantially more dishon-
est in the professional identity condition (Fig. 1b). On average, they re-
ported 58.2% successful coin flips, which is significantly above chance
(95% confidence interval: 53%, 63%) and significantly higher than the
success rate reported by the control group (P50.033, rank-sum test).
Figure 1 shows that the treatment effect appears to be driven by two
factors:(1) a higher fractionof subjects claiming the maximum earnings;
and (2) an increase in incomplete cheating (that is, reporting 6, 7 and 8
successful coin flips). Assuming that subjects did not cheat to their dis-
advantage, the rate of misreporting is 16% in the professional identity
condition. Alternatively, we can compute the fraction of subjects who
cheated, which is 26% (Supplementary Methods).
Regression analysis (Extended Data Table 1) shows that the treat-
ment effect is robust even when we control for a large set of individual
characteristics such as age, gender, education, income, and nationality
(P50.034, Wald test). When also controlling for business unit and ex-
perience in the banking industry, we find that employees in core busi-
ness units were more dishonest than those in support units (P50.008,
Wald test). However, the treatment effect is not stronger in these units
because the interaction between theprofessional identity condition and
working in a core unit is not significant (P50.960, Wald test).
There are several possible channels through which the professional
identity priming increased dishonesty. One possibility is that the banking
culture is characterized by norms that consider competitive behaviour
to be intrinsically desirable.Perhaps the professional identity condition,
together with the competitive feature in the coin tossing task, triggered
this cultural aspect and, thus, increased subjects’ desire to compete. To
examine this, we asked subjects the following question after the prim-
ing: ‘‘How important is it to you to be the best at what you do?’’ How-
ever, the professional identity prime did not change subjects’ desire to
compete (P50.861, rank-sum test; Extended Data Fig. 1). Moreover,
regression analysisshows that the correlation between competitiveness
and successful coin flips is statistically insignificant (P50.642, Wald
test; Extended Data Table 3b). It is therefore unlikely that a change in
subjects’ desire to compete is the channel through which the treatment
increased dishonesty. A related channel is that the professional iden-
tity questions might have reminded bank employees of their exposure
to competitive incentiveschemes and thereby increased cheating. If sa-
lience of competitive incentives were the driving force behind the in-
crease in cheating,we should observe a stronger treatment effect in core
business relative to support units, because competitive incentives are
more prevalent in core units. As described earlier, however, the treat-
ment effect in core units is similar and statistically indistinguishable
from the support units.
Norm obedience is typically affected by (1) what people believe they
should do, and (2) what they believe others do
24
. In principle, the pro-
fessional identity primecould have triggered beliefs that others report a
higher number of successful coin flips than is true, and this could have
induced subjectsto report a higher number themselves. To addressthis,
we conducted an incentivized experiment with 142employees from the
banking industry in which they had to predict other bank employees’
reporting behaviour (Supplementary Discussion). If a change in beliefs
was drivingthe treatment effect, weshould observe that the professional
identity questions induce bank employees to believe that other bank
employees are more dishonest. However, and in contrastto this predic-
tion, our manipulation did not affect beliefs about other bank employ-
ees’ reporting behaviour (P50.921, rank-sum test; Extended Data Fig. 2).
Many critics believe that the professional culture in the banking in-
dustry promotes unethicalbehaviour owing to its focus on materialistic
values
9,25,26
. We asked subjects about the extent to which they endorse
the statementthat social status is primarily determined by financialsuc-
cess. It seems likely that subjects who endorse this statement are more
prone to seek status through financial success, implying that their re-
sponses provide an approximation of their materialism. We found that
subjects in the professional identity condition endorsed the statement
significantly more strongly than those in the control condition (P50.034,
rank-sum test; Fig. 2a). Moreover, a stronger endorsement of the mate-
rialistic statement is positively correlated with the reported number of
successful outcomes (Spearman’srho 50.237, P50.007;Fig.2b).These
findings substantiate current concerns about the influence of materi-
alistic values in the banking sector and indicate that the professional
identity prime may have increased dishonesty through an increase in
materialistic values.
Our results suggest that bank employees’ compliance with the honesty
norm was weakened in the professional identity condition. This raises
a
0
10
20
30
Percentage
0 20 40 60 80 100 120 140 160 180 200
Earnings (US$) Earnings (US$)
Control Binomial b
0
10
20
30
0 20 40 60 80 100 120 140 160 180 200
Professional identity Binomial
Figure 1
|
Distribution of earnings in the coin tossing task claimed by the
bank employees. a,b, Each successful coin toss yielded approximately $20.
a, Distribution of earnings in the control condition in comparison to the
binomial distribution implied by honest reporting. On average, bank
employees reported 51.6% successful coin flips, which is not significantly
different from 50% (P50.415, two-sided t-test; n567). b, Distribution of
earnings in the professional identity condition in comparison to the binomial
distribution. Bank employees in the professional identity condition reported
58.2% successful coin flips,which is significantly above chance (P50.002, two-
sided t-test; n561) and significantly higher than the reported success rate in
the control group (P50.033, two-sided rank-sum test; n5128).
a
3
4
5
6
“Social status is primarily
determined by nancial success”
(1 ‘don’t agree at all’, 7 ‘totally agree’)
Control Professional
identity
b
50
55
60
65
Percentage of successful coin ips
Materialism
median
Materialism
> median
Figure 2
|
Professional identity, materialism and cheating. a, Materialism
measured by the extent to which bank employeesendorse the statement ‘‘Social
status is primarily determined by financial success’’ on a scale from 1 (not
at all agree) to 7 (fully agree). Subjects in the professional identity condition
show a significantly stronger endorsement of this statement (P50.034,
two-sided rank-sum test; n5128). b, Percentage of successful coin flips for
participants with a below-median or median level of materialism compared to
those with an above-median level of materialism. Above-median subjects
are substantiallymore dishonest (P50.010, two-sided rank-sum test; n5128).
Error bars indicate standard error of the mean (s.e.m.).
LETTER RESEARCH
4 DECEMBER 2014 | VOL 516 | NATURE | 87
Macmillan Publishers Limited. All rights reserved
©2014
the question as to whether this effect is specific to bank employees or
whether it also appears in other professions. We thus repeated the ex-
periment with 133 employees outside the banking industry. On aver-
age, they had 14.8 years of experience in a broad range of industries (for
example, manufacturing, pharmaceutics, telecommunications and infor-
mation technology). Many held positions in middle or upper manage-
ment. As in the case of the bank employees, the non-banking employees
were randomly assigned to a professional identity or control condition
(Supplementary Methods and Notes). If problematic business norms
that favour dishonesty are specific to the banking industry, we should
not observe a treatment effect in non-banking employees.
We found that the professional identity condition had no significant
influence on dishonest behaviour in non-banking employees (P50.128,
rank-sum test; Fig. 3a and Extended Data Fig. 3). A differences-in-
differences regression analysis (Extended Data Table 2a) confirms that
the treatment effect is significantly different for bank employees rela-
tive to non-banking employees (P50.013, Wald test), and insignific-
ant in non-banking employees (P50.191, Wald test), suggesting that
the treatment effect is specific to the business culture in the banking
industry.
An alternative reason for the treatment effect in bank employees is
that the banking industry is intrinsically tied to the concept of money, and
that the professionalidentity condition rendered the concept of money
salient. As there is evidence that the concept of money triggers more
selfish behaviours
27
, the professional identity condition could also have
triggeredmore selfish, that is, dishonest, behaviour. If that were thecase,
it would not be the norms of the banking culture, but the salience of
money that increased dishonesty in bank employees.
To examine this, we conducted another control experiment with 222
university students. Like the bank employees, the students were ran-
domly assigned to banking or control questions. In the banking con-
dition we asked them, for example, to name an international bank and
to list tasks they thinkare typical for bank employees. The control ques-
tions and other aspects of the design were essentiallythe same as in the
previous two experiments (Supplementary Methods and Notes). Thus,
if an increase in money salience caused the professional identity effect,
the students in the banking condition should also behave more dishon-
estly than those in the control condition.
However, thedata do not support the hypothesis that money salience
drives the professional identity effect. The banking questions had no
significant influence on dishonesty in students (P50.390, rank-sum test,
Fig. 3a and ExtendedData Fig. 4). A regression analysis (Extended Data
Table 2b) shows that the behaviour of students and bank employees
is not significantly different in the control condition (P50.105, Wald
test), but—in contrast to the bank employees—the students did not
change their behaviour in response to the manipulation (P50.588, Wald
test). The regression analysis further confirms that the treatment effect
in the bank employees and the students is significantly different (P5
0.048, Wald test).
Our results suggest that the prevailing business culture in the bank-
ing industry favours dishonest behaviour and thus has contributed to
the loss of the industry’s reputation. In contrast to their public image,
however, we find that bank employees behave honestly on average in
the control condition. To examinehow bad bank employees’ reputation
is, we asked people from the general population about the percentage of
successful coin flips they would expect bank employees to report in the
coin tossing task. Other survey participantswere asked how physicians,
prison inmates, or people from the general population would behave in
this task (SupplementaryMethods). The participants believed that bank
employees would be the most dishonest group (Fig. 3b); they believed
that bank employees would report a rate of 64% successful coin flips,
which corresponds to a cheating rate of 27%. This result, together with
representative evidence from other sources (Extended Data Fig. 5), shows
that the banking industry currently has a very bad reputation.
People’s confidence in the honesty of bank employees is a key asset
for the long-term stability of the financial industry. Understanding the
determinants of dishonest business practices istherefore essential forthe
development of possible remedies. Our results suggest that banks should
encourage honest behaviours by changing the norms associated with
their workers’ professional identity. For example, several experts and
regulators have proposed that bank employees should take a profes-
sional oath analogous to the Hippocratic oath for physicians
28,29
. Such
an oath, supported by ethics training, could prompt bank employees to
consider the impact of their behaviour on society rather than focusing
on theirown short-termbenefits. A norm changealso requires thatcom-
panies remove financial incentives that reward employees for dishonest
behaviours. In addition, existing research suggests that ethics remin-
ders may promote compliance with the honesty norm
4,21,30
. The use of
ethics reminders requires a detailed analysis of work routines to find
out where and when employees make critical decisionsregarding norm
obedience, so that normative demands can be rendered salient at the
right time and place.These measures may be an important step towards
fostering desirable and sustainable changes in business culture.
Online Content Methods, along with any additional Extended Data display items
and SourceData, are available in theonline version of the paper;references unique
to these sections appear only in the online paper.
Received 19 February; accepted 17 October 2014.
Published online 19 November 2014.
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a
−10
–5
0
5
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Average percentage point
difference in success rates of coin ips
(Profession/Banking − Control)
Bank
employees
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employees
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b
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55
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Guessed reported percentage of
successful coin ips
Medical
doctors
General
population
Prison
inmates
Bank
employees
Figure 3
|
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Supplementary Information is available in the online version of the paper.
Acknowledgements We thank the participating bank, the alumni network
organizations of three education programmes, and the municipal office for enabling
the research; G. Akerlof and D. Ariely for critical discussions; C. Efferson, T. Herz and
S. Gschwend forreading of the manuscript;and D. Bigliel and M. Brunnerfor research
assistance.Financial supportfrom the European Research CouncilGrant ‘‘Foundations
of Economic Preferences’’ and the Gottlieb Duttweiler Institute is gratefully
acknowledged.
Author Contributions A.C. and M.A.M. developed the research idea; A.C., E.F. and
M.A.M. designed the study; A.C. and M.A.M. conducted the experiments, and analysed
data. A.C., E.F. and M.A.M. wrote the manuscript.
Author Information Reprints and permissions information is available at
www.nature.com/reprints. The authors declare no competing financial interests.
Readers are welcome to comment on the online version of the paper. Correspondence
and requests for materials should be addressed to A.C. (alain.cohn@econ.uzh.ch),
E.F. (ernst.fehr@econ.uzh.ch) or M.A.M. (michel.marechal@econ.uzh.ch).
LETTER RESEARCH
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©2014
3
4
5
6
7
How important is it to you to be
the best at what you do?
(1 ’not at all important’ 7 ’very important’)
Control Professional
identity
Extended Data Figure 1
|
The impact of professional identity on bank
employees’ intrinsic competitiveness. Competitiveness is measured by the
bank employees’ answers to the question ‘‘How important is it to you to be the
best at what you do?’’ on a scale from 1 (not at all important) to 7 (very
important). We find no significant difference in competitiveness between the
professional identityand the control condition(P50.861, two-sided rank-sum
test, n5128). Error bars indicate s.e.m.
RESEARCH LETTER
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50
55
60
65
Beliefs:
Percentage of successful coin flips
Control Professional
identity
Extended Data Figure 2
|
Bank employees’ beliefs about other bank
employees’ percentage of successful coin flips. Incentivized belief elicitation
experiment with bank employees. The professional identity condition had
no significant influence on beliefs (P50.921, two-sided rank-sum test,
n5142). Error bars indicate s.e.m.
LETTER RESEARCH
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a
0
10
20
30
Percentage
0 20 40 60 80 100120140160180200
Earnings (in US dollars)
Control Binomial b
0
10
20
30
0 20 40 60 80 100120140160180 200
Earnings (in US dollars)
Professional identity Binomial
Extended Data Figure 3
|
Distribution of earnings in the coin tossing task
claimed by the non-banking employees. a,b, Each successful coin toss
yielded approximately $20. a, Distribution of earnings in the control condition
and binomial distribution (implied by honest reporting). b, Distribution of
earnings in the professional identity condition and binomial distribution.
The rate of successful coin flips is 55.8%(12% misreporting) in the professional
identity condition, and 59.8% (20% misreporting) in the control condition,
which is not significantly different (P50.128, two-sided rank-sum
test, n5133).
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a
0
10
20
30
Percentage
0 5 10 15 20 25 30 35 40 45 50
Earnings (in US dollars)
Control Binomial b
0
10
20
30
0 5 10 15 20 25 30 35 40 45 50
Earnings (in US dollars)
Banking Binomial
Extended Data Figure 4
|
Distribution of earnings in the coin tossing task
claimed by the students. a,b, Each successful coin toss yielded approximately
$5. a, Distribution of earnings in the control condition and binomial
distribution (implied by honest reporting). b, Distribution of earnings in the
banking condition and binomial distribution. The rate of successful coin
flips is 57.9% (16% misreporting) in the control condition and 56.4% (13%
misreporting) in the banking condition, which is not significantly different
(P50.390, two-sided rank-sum test, n5222).
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0 5 10 15 20 25 30 35
Very low/low honesty or
ethical standards (% of respondents)
1977 1982 1987 1992 1997 2002 2007 2012
Year
Extended Data Figure 5
|
Gallup survey of honesty standards of people
in the banking industry. Fraction of US citizens thinking that bankers have
very low or low honesty or ethical standards from 1977 to 2013. Thisgraph is an
interpretation of data compiled by Gallup, Inc. However, Gallup, Inc. had
no part in the creation of this graphic interpretation.
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Extended Data Table 1
|
Effect of professional identity on cheating in bank employees
Probit estimates. Reported results are marginal effects calculated at the median levels of the covariates. Robust standard errors corrected for clustering on the individual level are in parentheses. a, The decision to
report a successful outcome is regressed on a dummy for the professional identity condition and individual characteristics (n5128). b, The second model also includes job-related variables (n5128). Significance
levels: *P,0.10, **P,0.05, ***P,0.01 (two-sided Wald tests).
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Extended Data Table 2
|
Effect of professional identity/banking condition on cheating in bank and non-banking employees/students
Probit estimates. Reported results are marginal effects calculated at the median levels of the covariates. Robust standard errors corrected for clustering on the individual level are in parentheses. The decision to
report a successful outcome is regressed on a dummy for the professional identity/banking condition and individual characteristics. We include a dummy for bank employees and an interaction term between this
dummy and the treatment dummy. a, The first model compares the treatment effect in bank and non-banking employees (n5261), which is indicated in the table by the interaction between ‘Professional identity/
Banking condition’ and ‘Bank employees’. b, The second model compares the treatment effect in bank employees and students (n5350), which is again indicated by the interaction between ‘Professional
identity/Banking condition’ and ‘Bank employees’. We corrected the marginal effect of the interaction term by taking into account the nonlinearity of the Probit model. Significance levels: *P,0.10, **P,0.05,
***P,0.01 (two-sided Wald tests).
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Extended Data Table 3
|
Competitiveness, professional identity and cheating in bank employees
Probit estimates. Reported results are marginal effects calculated at the median levels of the covariates. Robust standard errors corrected for clustering on the individual level are in parentheses. a, The decision to
report a successful outcome is regressed on a dummy for the professional identity condition and individual characteristics (n5128). b, The second model also includes the bank employees’ degree of
competitiveness as an additional control variable (n5128). Significance levels: *P,0.10, **P,0.05, ***P,0.01 (two-sided Wald tests).
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