Rajat Gupta was on top of the world two years ago. As the former head of the management consultancy McKinsey & Co., Gupta was rich, respected, and extremely well connected. He was recognized as the first Indian-born CEO of a global corporation, hobnobbed with former presidents and world leaders, and sat on two of the most prestigious corporate boards in America, those of Goldman Sachs (NYSE: GS) and Procter & Gamble (NYSE: PG).
At the end of last year, however, it all came tumbling down. On Oct. 26, 2011, Gupta was arrested by the Federal Bureau of Investigation on charges of securities fraud and conspiracy. The allegations stemmed from an ongoing and wide-ranging insider trading case in which Gupta's close associates -- hedge fund manager Raj Rajaratnam and fellow McKinsey alum Anil Kumar -- had been convicted of insider trading in shares of Intel (NYSE: INTC), among others.
Although cases like this involving Wall Street titans are not unheard of -- the 1990 conviction of Michael Milken is probably the most prominent example -- they invariably raise a number of questions. First and foremost: Why do rich people with everything to lose do bad things?
Why the wealthy do bad things
In a series of experiments, a group of researchers at the University of California, Berkeley and the University of Toronto set out to answer this very question. What they found is perhaps as obvious as it is counterintuitive. It turns out, rich people do bad things simply because they're rich. In other words, when someone like Tiger Woods claims that money and fame caused him to stop living by the core values he believe in, perhaps he wasn't kidding.
The first two experiments examined whether upper-class individuals behave less ethically than lower-class individuals while driving. In the first, the study's researchers positioned themselves near a busy four-way intersection with stop signs on all sides. They then coded the quality of approaching vehicles and recorded whether the drivers cut off other vehicles by crossing the intersection before waiting their turn. In the second experiment, the researchers positioned themselves prominently at the entrance to a marked crosswalk. As above, they then coded the quality of approaching vehicles and recorded whether or not the drivers yielded the right of way. In both cases, people who drove nicer cars cut off fellow drivers and pedestrians at a higher rate than those who did not.
The researchers then examined whether wealth impacts honesty. Participants were asked a series of questions designed to gauge their socioeconomic status. They then played a "game of chance" in which a computer rolled a single die five times. Participants were told that higher rolls increased their chances of winning a cash prize and were asked to self-report the sum of the five rolls. While the computer was pre-programmed to yield a sum of 12 every time, the self-reported results did not. And after controlling for a host of other variables, the results suggested that members of higher social classes tend to cheat more than their less privileged brethren.
Last but not least, the researchers sought to determine just how low the upper class may go. As above, the study's participants were asked a series of questions about their socioeconomic status. At a purported break in the study, each participant was placed near a jar of individually wrapped candies, ostensibly for children in a nearby laboratory. While the participants were informed that they could take some, the purpose was to see whether they actually would, as doing so would literally amount to taking candy from children. As you may have guessed by now, the subjects who identified most closely with a higher socioeconomic class took the most candy.
Gordon Gekko would be proud
A number of years ago, Warren Buffett was famously asked by a fawning MBA student about the fastest way to get rich. According to accounts of the conversation, Buffett plugged his nose and pointed toward Wall Street. Although it's difficult to say whether or not this account is true, the experiments above certainly lend credibility to the underlying message. For investors, the point is that it's important to follow your own judgment as opposed to the advice of wealthy corporate leaders like Rajat Gupta and commissioned sell-side analysts who make a living trying to game the system and mislead the market.
