Posted by on Oct 19, 2010 in Articles & Advice, Blog, Columns, Featured |

Image Credit: Christophe Vorlet

By Jason Zweig |  Oct. 16, 2010 12:01 a.m. ET

Why do powerful people with so much to lose push so hard to squeeze out a little more gain for themselves?

That question lingers after The Wall Street Journal‘s series of articles about securities trading by members of Congress and their aides. As the Journal has shown, dozens of public servants on Capitol Hill (and sometimes their spouses) actively traded during the financial crisis — buying funds that profit in a falling stock market, using options to bet against shares of home-building companies, even trading in and out of stocks that stood to benefit from government interventions they helped oversee.

Such trades are legal, since prohibitions on insider trading generally don’t apply to Congress. All the members of Congress and staffers involved in the trades have told the Journal that they adhered to the relevant codes of ethics and complied with all requirements for public disclosure.

It is likely that the traders on Capitol Hill genuinely believe that their actions are beyond reproach, says Daylian Cain, a psychologist at Yale University’s School of Management. “This isn’t about corrupt people bending rules to line their own pockets,” he explains. “People are just not good at being objective about their own potential conflicts of interest. Whatever side of an issue we’re on, we can easily convince ourselves that we’re on the right side.”

Still, based on letters and online comments from the Journal’s readers, it seems that many Americans think members of Congress and their staffers are being disingenuous or deceptive when they maintain they didn’t do anything wrong.

That is because, in the financial markets, information is power. Whoever gets better information sooner has an advantage over those who receive the news later. In the public’s eyes, members of Congress, and even those who work in their offices, gain just such an informational edge by writing legislation and running investigative hearings. That is what separates investors on Capitol Hill from those on Main Street.

That edge may change the behavior of those in Congress who trade. “Power makes people feel both psychologically invincible and psychologically invisible,” adds Adam Galinsky, a professor of organizational behavior at Northwestern University’s business school.

Power, explains Prof. Galinsky, focuses people on their own internal goals — blinding them, in the process, to how others may view them. In Plato’s “Republic,” Socrates invokes the myth of the ring of Gyges, which conferred upon its wearer the power of being invisible to others. If we wear such a ring at will, Socrates says, “No man would keep his hands off what was not his own when he could safely take what he liked.”

Being in a position of power also may make people feel that they can do no wrong. In recent experiments, Dana Carney, a psychologist at Columbia University’s business school, has found that acquiring power makes people more comfortable committing acts they might otherwise be reluctant to commit, like lying or cheating. As people rise to a position of power, she has shown, their bodies generate more testosterone, a hormone associated with aggression and risk-taking, and less cortisol, a chemical that the body generates in response to stress.

“Having power changes you physiologically, reducing your body’s internal feedback that tells you which actions are good or bad,” says Prof. Carney. “Power temporarily intoxicates you.”

Naturally, the lessons of how power alters behavior apply to us all. When your investments have been on a roll lately, that may fill you with a sense of your own power over the market, leading you to feel that all your ideas are brilliant and that any evidence to the contrary is unconvincing.

One solution, says Don A. Moore of the University of California at Berkeley, would be to compel traders on Capitol Hill to disclose their trades more frequently, rather than once a year, as they do now. Others would be to ban trading outright, subject all trades to independent review before they can be executed or require members of Congress to put their assets in blind trusts.

“If you passed a law saying that [members of Congress and their staffs] can only invest in index funds, on the whole you would do them a great favor, for two reasons,” says Meir Statman, a finance professor at Santa Clara University. “First, they won’t be reading news coverage about themselves that they and their constituents don’t like. And two, they’re more likely to make more money on index funds than by trying to outsmart the market.”

Source: The Wall Street Journal,


A Perk of Power: Trading in Companies You Oversee

Conflict of Interest? Moi?

Pros and Conflicts: Whose Side Is Your Broker On?

The Big Corruption in Small Gifts

For further reading:

Daylian M. Cain, George Loewenstein, and Don A. Moore, “When Sunlight Fails to Disinfect: Understanding the Perverse Effects of Disclosing Conflicts of Interest,” Journal of Consumer Research (2011)

Zachariah Sharek, Robert E. Schoen, and George Loewenstein, “Bias in the Evaluation of Conflict of Interest Policies,” Journal of Law, Medicine & Ethics (2012)

George Loewenstein, Sunita Sah, and Daylian M. Cain, “The Unintended Consequences of Conflict of Interest Disclosure,” Journal of the American Medical Association (2012)

Definition of POTENTIAL CONFLICT OF INTEREST in The Devil’s Financial Dictionary