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No one deliberately sets out to make bad financial choices. We usually think we are doing the right thing at the time. Even so, all of us make money mistakes and have to deal with the consequences.
When a bad financial choice crosses the line into something unethical or illegal, the stakes are much higher. It is not just a money mistake, but a potentially life-altering decision that can have serious repercussions. Just ask Patrick Kuhse, a former bond trader whose unethical choices led to prison time and a lifetime ban from working in financial services. In a talk to the Financial Planning Association, he described seven key factors in his path to fraud and theft.
1. Extreme entitlement thinking. This is the belief that “I deserve (fill in the blank) without doing anything to earn it,” a sense that we are more worthy than others and deserve special privileges. It is not related to income level, and it often stems from childhood trauma. Entitlement thinking can be as financially harmful as its opposite: feeling undeserving of (fill in the blank) no matter how hard you work or how much you achieve.
2. Delusional optimistic thinking. This is not positive thinking, but overconfidence bias. It’s one of the problematic financial behaviors that can get us into trouble. It’s believing that you are a money master, that luck is always on your side, and that you are too smart to get caught.
3. Low emotional intelligence (EQ). People who make unethical financial decisions often have poor social skills and tend to be emotionally detached from themselves and others. They also have a strong instinct for self-preservation, even if it means hurting others.
4. “One time” trivial decision. This is usually the tipping point where delusional thinking and low EQ turn into an unethical or illegal action that is not well thought out and is seen as a “one-off.” The intentions are often good, even though the outcome may be bad for themselves or others.
5. Rationalization. This is what turns “just this once” into a habit. Rationalization says, “One more time won’t hurt because…,” or, “Everyone else is doing it; I need to level the playing field.”
6. Normalization. Once the fraud becomes a habit, the person becomes indifferent to their repeated unethical actions.
7. Victim thinking. Those who see themselves as victims don’t take responsibility for their actions when they get caught. Instead, they “double down” on their poor decisions. They justify their unethical behavior because of their circumstances, even if they would not view it as acceptable under normal conditions.
Kuhse cited a survey where college students were asked, “Do you think businesses are corrupt?” About 75% answered “yes.” (My own answer to that question would be “maybe 5% are.”)
In addition, 80% of the students believed they would be asked by a future employer to do something unethical. When asked whether they would comply, 75% said they would if it helped their career or they were sure they wouldn’t be caught. This rather discouraging example emphasizes the importance of modeling ethical financial behavior.
We can help ourselves avoid illegal and unethical financial decisions by asking four questions before taking any action:
- Am I feeling financial pressure?
- Is this opportunity or action legal?
- If I think it is legal, is it beneficial for everyone involved?
- How would I or my loved ones feel if my action appeared on the local news or social media?
Financial decisions that are not based on personal integrity are risky in many ways. Making sound, ethical financial choices – and teaching our children to do the same – is essential for financial wellbeing.
Rick Kahler, MS, CFP®, CFT-I™, CeFT®, CCIM, is the founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.
Read more articles by Rick Kahler
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
