“I am not a destroyer of companies. I am a liberator of them!
The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit.” These are the words of Gordon Gekko, played by Michael Douglas in the 1987 film Wall Street. The poster boy for unharnessed greed echoes the sentiment of rational free-market economists, who view greed as not only an inevitable aspect of human nature but ultimately a desirable one.
As the prevailing (yet simplistic) economic theory goes, greed motivates competition, and competition is essential for growth in a functioning market. By focusing on personal gains, people directly contribute to the greater good. The late American economist Milton Friedman espoused this ideology of greed when he said, “The world runs on individuals pursuing their separate interests.” He asked, “Is there some society you know that doesn't run on greed?” Homo economicus, the rational self-interested being that represents standard economic theory, benefits society only to the extent that he maximizes his own utility.
Yet greed has historically had a bad reputation. Even today the overwhelming majority of people shun greedy behavior. When we consider the situations in which financial self-interest benefits individuals and society and when it impedes, there are few of the former and many of the latter. The belief that greed allows markets to flourish is more likely a reflection of the ability of Homo sapiens to justify our selfish motivations than it is a prescription for economic success. Understanding this fact, along with a greater appreciation of greed's harm, can go a long way toward curtailing selfish behavior.
“Thou Shalt Not Covet …”
If we rewind to ancient times, the idea of greed as a sin is planted throughout history. Philosophers from Socrates and Plato to David Hume and Immanuel Kant viewed greed as a moral violation, to be avoided and denounced. Roman Christian poet Prudentius depicted greed in the Early Middle Ages as the most frightening of all vices. And in its itemized treatment of this sin, among others, the Bible set forth the 10th commandment: “Thou shalt not covet thy neighbor's house, thou shalt not covet thy neighbor's wife, nor his manservant, nor his maidservant, nor his ox, nor his ass, nor any thing that is thy neighbor's.”
Today, rather than taking a purely moral approach, much of the opposition to greed appears to stem from its negative effects on others. When people prosper at the expense of others, for example, observers are repulsed. In a study published in 1986 psychologist Daniel Kahneman, now emeritus professor at Princeton University, and his colleagues showed that consumers refuse to support companies that take advantage of their customers for the sake of profit (through price gouging, for example). More recently, in unpublished work, Amit Bhattacharjee, now at the Tuck School of Business at Dartmouth, and his colleagues at the University of Pennsylvania reported that people judge even the mere act of profit seeking as harmful to society. The researchers found that more profitable firms were regarded as less deserving of their winnings, less subject to competition and more motivated to make money regardless of the consequences. Furthermore, when asked to compare two hypothetical organizations that were identical aside from their “for-profit” or “nonprofit” status, people perceived for-profit firms as less valuable and more socially damaging than the nonprofits. Thus, the perception of greed as harmful extends to the mere act of profiting, which is of course the only way that capitalist markets can function.
This aversion to greed-driven, profit-seeking behavior may be based on a fundamental desire for fairness, including, for example, more equal wealth distribution. In a study published in 2013 sociology graduate student Esra Burak of Stanford University showed that 61 percent of Americans claim that they would support a cap on compensation for extremely high earners, regardless of how hard they have worked or what they have achieved. In addition, in laboratory games in which people are asked to contribute to a public pool of money that will later be split among all participants, players readily penalize those who greedily hold on to their resources. They keep defectors in check and will do so even when restoring fairness comes at a personal financial cost.
Yet not everyone finds value in suppressing greed. In a series of studies published in 2011 organizational behavior professor Long Wang of the City University of Hong Kong and his colleagues had students play the “dictator game,” in which participants are granted a sum of money that they can divvy up among themselves and an anonymous partner in any way they choose. The researchers found that the more a student had studied economics, the more money he or she kept for himself or herself and the less likely the individual was to explain his or her actions in terms of fairness. In a second study, students reflected on their past greedy behavior in writing, rated the morality of greed in general, and tried to define greed in their own words. By all three measures, the more students had been schooled in economics, the more positively they viewed greed. And as a third experiment showed, even just a hint of exposure to economic theory can convince people of the virtues of greed. The researchers found that students with no prior training held more positive opinions of greed just after they read a statement on the economic benefits of self-interest.
Although we may be easily swayed by these convenient rationalizations, the economic justification for greed is nonetheless shortsighted. Ferocious competition may occasionally lead to optimal market outcomes, but it can also have harmful side effects. Think about competition in sports. At first glance, the drive to be the best appears to propel human achievements to new heights. World records are surpassed, and yesterday's Olympic medalists pale in comparison with today's champions. Yet extreme dedication has costs. Athletes may not spend enough time with their friends and families, or they may sacrifice their long-term health to perform better in the short term—by overexerting their body or taking performance-enhancing drugs such as steroids.
The consequences of unchecked greed can also spill over into society. In his 2011 book The Darwin Economy, economist Robert H. Frank of Cornell University outlines some of the disastrous effects of allowing competition to run free. Take, for example, neighbors gunning for social status. Each tries to outdo the others, purchasing a slightly flashier car, bigger pool or more expensive grill. When Joe Jones down the block builds a home theater and Jane Smith across the street installs a 3-D amphitheater, you will no longer be satisfied with your meager widescreen television. We don't simply try to keep up with the Joneses, we try to surpass them—triggering what Frank calls “expenditure cascades.” That is, high spending by top earners shifts the reference point for those earning just a bit less, affecting those next in the ladder of prosperity, and so on. This chain of events can culminate in all classes spending more than they can afford, leading to a higher likelihood of bankruptcy (from increased debt), divorce (from the pressures of financial instability) and longer commutes to work (after moving to cheaper neighborhoods to cope with the debt).
The financial crisis of 2008 arose from a similar conflict between eagerness for short-term gains and long-term prosperity. High competition among financial institutions drove them to “financial innovations” that eventually left many of us with bankruptcies, foreclosures, a lack of trust in the market and a substantial national debt that we will be paying for generations to come.
Greed can also encourage ethically dubious behaviors. In an unpublished experiment with Lalin Anik of Duke University, we investigated whether people would be more willing to profit at the expense of others if they could rationalize their actions more easily—specifically by claiming that their motives were intended to benefit another group: shareholders. To explore this hypothesis, we asked participants to imagine themselves as the CEO of a publicly traded bank. We gave them a list of ethically questionable actions that would profit their company and asked which ones they would take. They could, for example, charge overdraft fees, increase interest on securities held or use tax shelters to offset income with losses from previous years. When participants were told that their primary goal as CEO was to maximize shareholder value, they were much more willing to partake in these ethically questionable acts. And when some of these participants were told that their year-end bonuses depended on satisfying this goal, the questionable behaviors became even more popular.
Perhaps shockingly, these results were most pronounced for those who aced the three-item financial literacy test we gave them. That is, those who were more educated in finance were even more inclined toward questionable behavior. Although most of us perceive avarice in a negative light, we can be greedy ourselves when given the right justifications for our behavior.
Despite this capacity to rationalize selfishness, people do not always avail themselves of it. They can often be quite selfless, sacrificing their own welfare to benefit others. People help those in need, donate money to charities and volunteer their time. (Yes, even economists sometimes help the elderly lady carry her groceries across the street.) In scenarios such as the dictator game, most participants reliably share some of their wealth—despite the fact that the rational economic decision is to keep it all.
All in all, humans are part Scrooge and part Robin Hood. We are more likely to be selfish when we can easily explain our choices or when we fail to consider the people who could suffer from them. Yet when we think about the people whom we can hurt and help, we behave more considerately. The lessons are straightforward: we must not let rational economic theory eclipse the fact that greed can be damaging. Next, we should work to make the consequences of our actions clearer, with the hope that our cooperative spirit will be boosted by concrete examples of those who might bear the brunt of our actions. And finally, we must combat the rationalizations of self-interest, including the simplistic mantra that greedy behavior propels society forward.
Yet if you are still trying to surpass the Joneses, bear in mind that above the poverty line, having more money will not make you appreciably happier. In fact, research shows that individuals who focus on financial success are less stable and less happy overall. So rather than splurging on a high-end grill that will make your neighbor jealous—and perhaps add to your debt—choose instead to help your neighbor assemble her grill for a block party cookout. And if the party small talk turns to the economy, slip in a pitch for cooperation rather than greed.