We talked about theft a couple of years ago but it’s on my mind, again. I still struggle to come to terms with it, despite overwhelming, conclusive evidence that it is true: A small percentage of the population will steal, simply if given the opportunity.
They won’t even need the stuff. They may not even want the stuff. They’ll steal for no other reason than they can. Like a vestigial appendage, it seems to be some sort of genetic adaptation left over from the nomadic days of humanity, when scavenging and hoarding resources undetected resulted in an increased chance of survival.
There is a meaningful gender difference by country. The evidence indicates that, in the United States, women are twice as likely to embezzle from a work environment as men, but this could be explained by the fact that women tend to take jobs that have access to the cash, providing greater temptation and opportunity (the Bureau of Labor Statistics shows that 91% of all bookkeepers are female), though that seems doubtful as females display a greater preference for theft in general – e.g., moms are more likely to steal their kids’ halloween candy than dads, so there is probably some neurological basis. The figures are different in the United Kingdom. For whatever reason, when it comes to the British Empire, it is male middle managers who feel like they haven’t gotten their due that are the most likely culprit when it comes to embezzlement; the motive is not greed or financial gain, but revenge. Ergo culture and ingrained expectations of fairness, not simply genetics, must play some role.
Non-profits and religious organizations are more likely to be the victims than their overall presence in the economy would indicate, though, again, this isn’t surprising given that people who regularly attend Church are more likely to steal things like newspapers as found by Austrian economists Gerald Pruckner from the University of Linz and Rupert Sausgruber from the University of Innsbruck in their 2008 paper, Honesty on the Streets – A Natural Field Experiment on Newspaper Purchasing.
We’ll get to all of that in a moment. For now, let’s retrace what was discussed back in 2011 when the topic was first raised on the blog.
My Acceptance of People’s Propensity to Steal Began Almost Ten Years Ago
In the autumn of 2004, I was a 22 year old college student a semester away from graduating with a liberal arts degree in music. I was completing an internship at a $5 to $6 billion insurance company in New Jersey that the President of the University had helped me secure due to my desire to understand the economics of the property and casualty markets, and about to start another internship at record label Warner Music Group’s headquarters in New York City. Periodically, I would meet with the CEO, who was one of the most helpful, honest, and wonderful men I’ve ever encountered – he had grown up working class, decided he wanted to make money, and became the first in his family to go into law. He chose the company by identifying which employers treated their employees best, then found a way to get hired. A couple of decades later, he ran the place. He’s now retired.
[mainbodyad]When I was digging around through the business, meeting with new hires, lower level managers, and reinsurance executives, I was regaled with stories about how this man had touched their lives; things like, “I was in the delivery room in the middle of the night after my wife gave birth. He called the hospital, got through to me, and congratulated me. I still don’t even know how he knew or that he paid attention to someone as far down the rung as I was.” I decided that this was the type of man I wanted to be. High integrity. Kind. Brilliant.
During one of these meetings, I asked him a question: “What is the single most important thing that you think I should learn from this experience? If I forget everything else, and it’s the only idea that sticks with me for life when I someday run my own businesses, what would it be?”
And without hesitation, his usual joviality disappeared for a moment. He answered forcefully, looking me straight in the eye: “Internal audit”.
That was not the response I expected. It took me completely by surprise.
“Joshua,” he said, “there are a lot of people who are otherwise good. You would like them. They do their work well, they raise their families with affection, you enjoy being around them. When faced with temptation, such as seeing easy money that they can get away with stealing, they can’t help themselves. They will give into that temptation and cost your business real cash. When and if you finally catch them, even if you recover the money, you now have a responsibility to the other shareholders or policyholders to handle it responsibly, which will inevitably ruin the life of the otherwise decent person. It may cause them to get divorced. Their kids may hate them. They will have a hard time getting hired, again. They may even go to jail. The fascinating thing about it is that they won’t even think of it as stealing – in almost all cases, they will begin by thinking, “I’m just going to borrow this for awhile”, or “It’s so small it won’t matter”. They almost never, at least in my experience, actually plan on taking as much as they end up taking. Most fully intend to pay it back before anyone notices.”
The Implications of This Caused Me Significant Emotional Distress
I had a very hard time accepting this. I grew up in a household where there were only a few rules. The most important, above all others, was “don’t lie”. The next was, “don’t steal”. If we were to walk through a grocery store and take a grape, eating it as we shopped, I think it would have resulted in Armageddon. That stuck with me – if I find a pencil that I borrowed from someone years ago buried in a box from college, I’ll mail it back to them. The idea that a large part of humanity would willingly steal from others because they had the opportunity caused a significant amount of emotional distress. I didn’t want to believe it because the implications were painful.
A few months later, I flew back to Kansas City and drove up to Omaha to the Berkshire Hathaway shareholder meeting. It was the first year Charlie Munger’s writings had been made available for sale in Poor Charlie’s Almanack. Returning to New Jersey to finish the last few things I needed to wrap-up before being handed my university degree, and shipping off the manuscript for my first book deal, I spent the next couple of weeks in my bedroom on the third floor of the apartment, sitting in a white reading chair that I had bought at Nebraska Furniture Mart, staring out over the fountain in the pond below as I read, re-read, marked up, scribbled upon, and called both Aaron and my father to discuss the ideas Munger espoused.
Munger constantly reminded the reader that human nature being what it was, employee theft was inevitable so it was the moral responsibility of the owner to protect both the shareholders and the employees from their own worst nature. He talked about John H. Patterson, who suddenly discovered that a cash register, which made it difficult for his employees to steal, turned an unprofitable retail store in to a profitable venture. (Patterson went on to launch the famous National Cash Register Company, which has a remarkable history. He was smart enough to know a good opportunity when it appeared).
Munger hammered home that it was your responsibility to prevent it if you could, saying things like, “If you carry bushel baskets full of money through the ghetto, and made it easy to steal, that would be a considerable human sin, because you’d be causing a lot of bad behavior, and the bad behavior would spread.” (Interestingly, Munger also has spoken on his belief, which he shared with John D. Rockefeller, that if you catch someone stealing like this, it isn’t necessary to totally destroy them for the sake of vengeance. He is a fan of summarily dismissing them and taking your losses. I’m not sure how I feel about that if it creates a problem that is kicked down to the road to others without creating a warning signal, such as a conviction, that might allow them to make better informed decisions.)
This was, again, difficult for me to accept. In a span of a few months, two of the people I respected most had reiterated this same idea, with strong conviction. I decided that, though I hoped they were wrong, I would proceed in life as if they were correct, opting for humility in the shadow of their considerable combined accumulated experience. If they were correct, I’d be protected. If they were wrong, there was no real harm but for a bit of expense on the compliance side.
Life Experience Has Now Taught Me These Two Men Were Correct
It’s been almost a decade since that time and I realize now that both of these men were correct. I watched one employee of a family business – a beloved volunteer firefighter who was a deacon at his church – rob the company blind through embezzlement, while still believing he had done nothing wrong.
[mainbodyad]I witnessed a mentor of mine, a music teacher who founded one of the largest art institutes within 500 miles, fume over the discovery that her long-time friend and secretary had been stealing donations by establishing a second checking account, steam-opening the bank statements, and modifying them so no one would discover the checks she had deposited into what became her personal slush fund.
I’ve heard stories of friends and relatives having their identities stolen by their parents or siblings; credit cards opened in their names without their knowledge.
I had lunch with one self-employed gentleman who went from earning $1 million a year to near bankruptcy because of employee theft, which was discovered when the cash went missing and made it impossible to cover the bills of the otherwise profitable enterprise. (He ended up rebuilding and is back up to the seven-figures a year mark the last time I checked, though it took awhile.)
One would think, by now, I would have become accustomed to it but no matter how hard I try, I still have difficulty grappling with this, the same way I can’t understand envy. I was reading a thread on Reddit titled, “What’s the luckiest thing that’s ever happened to you?“. And one of the top answers, with 2,100 net upvotes is this disgusting comment:
One time I ordered a PS3 online after debating because money, I ended up receiving 3 PS3’s..was expecting to get struck by lightning for a week after that.
It is almost as popular as the guy who randomly caught a toddler falling 20-25 feet from the upper level of a mall.
I’m normally a very cool, calculating, rational man. When I read that, though, I feel what I can only describe as bewildering mixture of rage, contempt, and pity. Receiving three of something you ordered isn’t luck. If you keep it without notifying the company, it’s theft. It makes you absolutely no better than someone who pickpockets a wallet or snatches a purse. I don’t understand how a human can go through life being restrained solely by the mechanisms in place that make it difficult for him to take something. And the thing that gets me most is the fact that once someone engages in this behavior, they actually believe – they convince themselves – that “everyone does it”. They truly, deep in their core, think their behavior is normal, despite representing a minority of the population. They can’t accept that most people are honest. They create all sorts of justifications instead of detaching themselves from their own behavior and analyzing it rationally from a third-party perspective to the degree such a thing is possible.
You should value yourself, and believe yourself sufficiently worthy, to demand excellence in both behavior and speech. You should be your harshest critic. You should set standards and expectations for yourself that far exceed what your parents, family, friends, coworkers, or society think appropriate.
What Should a Business Owner Do In Light of This Information?
There are a few things we can do when faced with this unfortunate reality:
- No matter how much you trust people, design your business processes around mechanisms that require verification, have safeguards, leave audit trails, and have periodic review schedules. Vendors, employees, owners – nobody should be above scrutiny. It’s not personal. It’s the only rational way to proceed.
- Recognize that the thief is almost never who you think it is going to be.
- When dealing with personal wealth, going stealth may be the most effective strategy for prevention.
- Decide how you are going to deal with it before it happens. Are you the, “let it go quietly” type or are you the, “I’m going to destroy your life” type? Will your response differ depending on who it is? For example, if your parents were to steal thousands of dollars worth of your computer equipment, a car, or some other possession, sell it, then pocket the cash without telling you, would you call the police and have them arrested? What if it was a friend? A stranger?
In our business, theft is almost impossible as practically everything is digital, with redundant monitoring systems. No cash is handled – it’s all numbers on a screen. The only hit we’ve suffered has been the occasional end-customer who refuses to pay a bill, which we almost always recover even if it involves legal action. By accepting a fact that I still find emotionally unpleasant, I’ve saved us a lot of potentially expensive lessons. And that itself is a lesson – never refuse to act because you have a hard time believing something you’d rather not believe.
If you own a business, I would put this on the top of your agenda. Do an audit – even if it’s monitoring the inventory in the freezer at your restaurant so the employees aren’t walking out with free steaks.
Reader Comments (19)
Comments are presented chronologically, with replies indented beneath the comments to which they respond.
joe pierson
November 19, 2013
Open my gararge door one night, found boxes of tupperware!
Lady down the street picked it up the next day.
She was nice, but I still despise tupperware sales tactics and anyone involved with them.
DividendGrowth
November 19, 2013
Ha. when I started reading this article, I immediately thought about Patterson and his NCR company. In order for you to have a successful enterprise, you need to cover your bases first. This means, establish internal controls, which segregate incompatible duties.
Therefore, the person that orders things is different from the person who receives them in the warehouse, and a third person pays the invoices, after a review by someone who does a three way match ( PO, receiving, invoice). A more simple control is the cash register, coupled with inventory counts ( plus the items i described previously).
The worst theft is when those in charge of the company do management override, where they do as they please. Examples include Healthsouth, Enron, Worldcom etc..
Trust, but verify Joshua, that is the life principle to live your life...
TheLonelyHumanist
November 19, 2013
Some people are simply better than other people.
Paarthurnax
November 19, 2013
One of my favorite articles from you recently. It really is saddening to learn about how prevalent crime is in the world. I was raised in a similar way to you, and it was an adjustment for me as well, when I started to see just how prevalent stuff like this is in the world.
A friend of mine used to work as one of the asset protection managers for a popular retail store and he told me that on the national average 1 out of 8 people who enter the store will try to shoplift. That blew my mind.
I like the point you made about stealing being perhaps a tie to our early nomadic lifestyle. Tying into the same idea, in outdoor survival training a student is always taught to exploit any opportunity (stumbling upon some food, finding dry fire-starting kindling, etc.) as a passed opportunity can be the make or break in surviving. In today's world though, I would like to think that a modern human being would be able to consciously act more appropriately.
clobber
November 20, 2013
Always enjoy your blog and this is a very nice article. I understand that it is written from the business owners point of view. The overall content and tone leads me to summarize the lesson, "Hey always ethical business owner, don't ever trust your always cheating employees (embezzlers) and customers (PS3 keeping fools)."
I would only point out a couple of observations/reactions:
1) I'm not a lawyer or even close to it. However, I think your PS3 example is more complicated than your reaction suggests. There are laws covering unsolicited merchandise. Title 39, Part IV, Chapter 30, 3009 of the U.S. code says it is *not* stealing to keep the extra units. There is even a page on the USPS site concerning this scenario. I wouldn't even begin to argue the ethical issues.
http://about.usps.com/publications/pub300a/pub300a_tech_021.htm
2) Why would such a law exist? I can only guess. Probably because business owners were sending unsolicited merchandise and then demanding payment. Like the thieving employees you described, the majority of these business were probably run by "otherwise good" people, but when faced with temptation and shareholder demands chose to "steal" from their unsuspecting customers.
How should the always loyal employees and customers deal with the always cheating business owner?
As I sit here thinking about your article and my response, covering the business owner, customers, and employees - all I can hear is Gordon Gekko rattling off something about greed.
thanks
Dheeraj
November 20, 2013
what should be one's behavior in an economy/system. where
A) you can actually call it a ghetto ...... very personal as i read pirated books downloaded from internet ....... but am i right in justifying my behavior where in a city with population of 3,073,350 ( http://en.wikipedia.org/wiki/Jaipur ) there is not a single public library ( actually their is one but it's deposit is equal to one month salary of my dad 🙂 and books aren't updated being it government run) ....... which is offset by cheapest mobile comm. rates in the world..... thus cheap internet too ( $2 1GB 1month).
B) where every body else is cheating too and with almost no vigilance. what about argument ( my own, self fulfilling ) if you don't cheat in a zero sum game like situation .... you lose. ( reminds me of an irrelevant quote from a big software developer-vendor regarding china and india that they may copy our product but what is important is that they copy only ours, not our competitor's........... which leads me to think that an IP developer-owner have already discounted the impact of piracy in aforementioned countries )
*************
as munger said on sokol incidence ( which is example of stealing, right ? http://borsheimsbrk.com/1880/transcript-of-sokol-related-questions-from-berkshire-hathaway link been deleted from brk website it seems ) when a man does a bad deed ... he should counter balance with a good one, my will, will read like this (a la socrates ).... send $100 to robert hugstrom.
FratMan
November 20, 2013
Joshua, I tentatively agree.
However, I do think there is a counterpoint. Munger has also mentioned that granting people trust can be a great way to create motivational employees. I'm curious as to how this fits into employee morale--if your employer is watching your every move, effectively conveying the notion "I don't trust you", couldn't that easily lend itself towards resentment and a higher likelihood of turnover among the best employees under a "I don't like being treated like cattle" theory?
One summer, I had a great employer that would basically give me free reign--he expected a certain amount of work done each day, and since I got it done, he pretty much left me to do my own thing. If I browsed the internet for twenty minutes during the workday, or showed up at 8:04 instead of 8:00--those kinds of things wouldn't get measured because I got my shit done.
Meanwhile, my best friend had a job that traced his keystrokes so they knew everything he did on the company computer, blocked certain sites like Facebook from being accessed, had cameras installed in the workplace, gave out "demerits" if you were so much as a minute late, and so on. That work environment sounds terrrrrrrrrrrrible. The thought of working at a place like that for forty years and then dying sounds like Exhibit #1 on the kind of life I'd want to avoid.
I'm not questioning the legality of the employer to engage in espionage, but I am questioning the desirability of working in such an environment wherein everything is tracked. Under a golden rule theory, I wouldn't like to be explicitly distrusted and spied on, so if I become an employer, why should I do unto others what I would detest if done to me? Also, I think that showing trust in employees can bring out extra productivity gains, because feelings of trust make you feel appreciated (and you want to protect that trust) so you might pick up a more loyal and inspired employee.
I don't disagree with your findings that theft is a bigger problem than we might intuitively think, but I think I disagree with this portion: "No matter how much you trust people, design your business processes around mechanisms that require verification, have safeguards, leave audit trails, and have periodic review schedules. Vendors, employees, owners – nobody should be above scrutiny. It’s not personal. It’s the only rational way to proceed." I think an "earned trust" model could be an equally compelling way to proceed, because it rewards patterns of good behavior, creates an environment that leads to loyalty and good vibes, and probably increases productivity to the extent that you are thankful for the trust and want to reward the employer for the benevolence. For instance, a great way to earn trust is if someone repeatedly has an opportunity to screw you over, but declines to do so. Why not create an incentive structure that rewards good actors by giving them more trust?
archont
November 20, 2013
Theft is the rationally optimal strategy for maximizing gain. There is risk of being caught so a person has to perform a cost/benefit analysis.
We're social, but not eusocial. We're wired to maximize our own gain at other's expense, unless those others are genetically related or belong in our "group", for varying definitions of group.
Any robust system, like you wrote in the post, should be designed around the assumption that theft is the rational choice for an individual, and that an individual will perform a risk analysis. The point is to make it risky enough for it not to be worth trying.
I wouldn't hold it against people who steal, should I ever be put in that position. Sure, I'd try to set an example, publicly denounce them for their actions and corrupt behavior, but deep inside I'd be thinking "you've outsmarted me, good job!".
Jacob T.
November 20, 2013
I grew up with a few thieves, and it is very true -- they steal only because they can a lot of the time. The most common justification I encountered though, was: "If I don't take it, then somebody else will" as if they are missing some kind of golden opportunity.
There are those that steal because they at least feel like they have no other choice. This is a given, but not a justification of most theft.
There are also ones who do it because it is a way for them to find and feel some type of purpose. They have an inherent need to satisfy some psychological requirement in their head to justify themselves or release some kind of pressure built up. I would compare the second option to an addiction to drugs, where nothing is right until you finally "get right". I have never personally encountered this type of kleptomania, but I do know of its existence.
Even after just considering the reality of any of these at least causes me to evaluate my personal and business property for proper safeguards. I can understand growing up in different backgrounds can make it hard to comprehend the reality of this threat, yet it is very real, and it must be addressed.
Scott McCarthy
November 20, 2013
In a case such as A, I could make the argument that, economically, piracy is both efficient and even socially desirable.
If we assume that the overall market for the products in question is monopolistically competitive, then a situation where marginal cost (to the producer) is equal to marginal revenue (to the producer) would be efficient. If MC=MR=0, that's efficient.
Now, a producer would claim that piracy (generally speaking) results in a negative MR based on opportunity cost. BUT if the product being pirated is ONLY being consumed by those who would NOT have purchased the product at the non-pirate market price, this argument fails. To the extent that there are no negative externalities (you're paying for your internet usage and electricity), then society benefits on the whole, as you enjoy marginal consumer surplus without reducing either producer surplus or economic profit.
Joshua Kennon
November 21, 2013
Excellent counterpoints, and well argued.
(Not entirely related, but somewhat relevant: We actually have the monitoring software on all of the business and home networks, but (in my case), it's a tremendous productivity tool. You can see how many hours per months are wasted or used watching funny YouTube clips or playing Facebook games. It's helped revolutionize how I manage my digital time, and there is still a lot of room for improvement. I agree, it could be abused. I wouldn't want to work in an environment like that. In our case, we actually get together and watch the video replays of how we worked for a several month period, viewing charts of how our time was spent; it's fascinating.)
Pablo Seto
November 22, 2013
Hi Josh,
Your article made me think immediately of a book by Dan Ariely called The Honest Truth About Dishonesty. He is a professor who focuses on behavioural psychology and has written three books on how irrational we are as human beings. In the book above, he gives a good explanation of how people can rationalize inappropriate behaviour. After reading that book, I've caught myself doing it a few times!
segfault
November 24, 2013
The PS3 story reminded me of the PowerBook G4 I ordered many years ago. I received one, then an identical one the following day. I called Apple and it took some effort on their part to figure out that the shipment had been processed twice, although they had only charged me for one laptop. I don't remember the specifics, but do remember they took the second one back without hassle. Yes, at least one of my friends told me I should have kept the second one.
Steve Roberts
August 12, 2016
Replying to segfault
Years ago I ordered a wireless router from Amazon. Instead of getting one I got a wholesale box full of 20 (unopened). I'm guessing someone didn't know to open the wholesale box and pull one out and just ship me one.
I called Amazon and it took a while before I got someone on the phone who understood what happened and would issue me a return printing label (didn't they want the other 19 wireless routers back?)
To this day, I am still disappointed in those who said I should have kept them all.
AMinSF
November 26, 2013
I think taking an absolutist/high moral ground on this is counterproductive. Author mentioned that he employs software that monitors employees productivity. I personally find such tactics abhorrent. Guess I'd rather have motivated and trustworthy employees who I don't need to monitor, and I could care less if they take some sticky pads or pens from the supply room. My morality incorporates the liberty of not sweating small, and IMO, insignificant stuff. I'd rather focus on the big picture. As for major transgressions (syphoning off cash, serious theft), that is a different story. But I think the link between the two (insignificant vs. major) is very weak.
AMinSF
November 26, 2013
I added a comment earlier, what happened to it?
scott
November 29, 2013
So does being born with the propensity to steal rationalize this behavior as moral?
Cheers,
Scott
Bill
September 10, 2014
While re-reading this post of yours again today, your quote by Munger stuck out to me. After recently reading some debate arguments about other crimes in the world (in this case, rape), I find myself a bit taken back and up in the air on the logical stance of this sort of argument and how it implies to other aspects of our world...
"Munger hammered home that it was your responsibility to prevent it if you could, saying things like, “If you carry bushel baskets full of money through the ghetto, and made it easy to steal, that would be a considerable human sin, because you’d be causing a lot of bad behavior, and the bad behavior would spread."
In some of the debates I've recently read, there are some people that argue (perhaps simply to play devil's advocate) that in some situations, the woman who is raped, is partially at fault for dressing in a provocative manner, which inspired someone to commit the crime that may not have done so otherwise.
Comparing the two crimes is a bit apples to oranges, but it's interesting to see the same philosophical stance applied to both issues, and how differently the reaction to each argument can be. I myself, agree with Munger's point about business, but when applying that same argument to something like a rape case, I find myself suddenly abandoning that idea, feeling that 0% of the fault is on the victim, regardless of what her actions, words, dress, location, etc was.
I certainly doubt I'm the only one who feels this way, but I'm curious to hear your thoughts.
-Bill
Erin D Lindsey
August 12, 2016
Another article I saw recently reminded me of this one, which I read a lot when it was new, because at the time I was on the outs with a friend who seemed to be one of those people. I've heard people joke "when you go out with friends, say you've forgotten your wallet, or bring an expired or canceled credit card, and they'll have to pay." (This always horrified me, by the way. There's no way I could stomach doing that to people.) well, my friend did that for real. A lot. It got to the point where I'd ask her about it, and she'd swear up and down that she had her billfold and everything was good financially, only for it to happen again when the check or the tab came.
I know I should have confronted her over it, but other mutual acquaintances told me "she's just bad with money and doesn't realize her card is maxed out or her bank account is dry whenever you hang out." But the incidents got to be too frequent and too calculated for it to be something that could just be chalked up to carelessness with money. And then I found out that she'd been fired from a previous retail job for theft. She explained it away by saying that she'd been in a desperate situation, but also said that "everyone else was doing it."
The thing is, I don't think she is a "bad person." I genuinely think there is a neurological issue in play, but it wasn't one that I wanted to trip over anymore.
I basically just stopped hanging out with her altogether.