Sacred values in financial economic decision-making: Experimental evidence

Seminal work in finance, economics, and psychology has documented that individuals tell the truth more often than standard economic models predict. But researchers have so far only indirectly inferred a preference for truth-telling from agents’ observed behavior. Using experiments, we explore finer predictions of a theory of managerial decision-making that considers the possibility that some agents may consider truth-telling as a “sacred value.” We study this value in the context of earnings management. We find that individuals who have a strong commitment to truth-telling are more likely to forgo monetary gains in favor of telling the truth about the earnings of their firm. While most subjects react to costs of truth-telling,those with stronger sacred values for truth-telling react less. We also find that subjects with stronger sacred values for truth-telling react less to social norms. By contrast, our measured sacred values for truth-telling have no predictive power for how the same individuals behave in a pure effort-based task which does not require any moral judgments. These findings as well as the robustness analysis we conduct strongly support causality between sacred values and value-related decision-making in finance, rather than spurious self-consistency. We argue that these experimental results have wide-ranging implications for financial research and for practice, in particular for the selection of managers, the design of managerial incentives, and the design of regulation.