Decision making

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Cheating, emotions, and rationality: an experiment on tax evasion
Description and objectives
The experiment seeks to link the connection between emotions, rational thinking and deception, a concept that is often ignored in many economics of crime approaches. Emotions are quantified on the basis self-response and response to skin conductance. The experiment explores the fact that the intensity of anticipatory emotions is related to positive reporting and the decision to cheat and evade income. Emotional arousal is seen to be increased after an audit report and even stronger after a portrait of the person in question is displayed in the public domain. The report further shows that exposure to the public of details of deception helps deter it greater than merely imposing fines. The results of this experiment highlight that exploiting the emotional aspect of cheating helps enhance compliance. Cheating is a usual event in the market platform. Social fraud and tax evasion provide good examples of deception by agents in the field of business. In its standard approach, the economies of crime concept tends to associate deception with the cost of cheating versus the expected benefit.
Often the cost of cheating is judged by the financial consequences that follow the detection. Little attention is however given to the actual process of cheating. It is this notion that has inspired the research into other methods of deterring tax evasion such as social norms, tax morale and ethics. This experiment majorly explores the link between the emotional aspect of cheating and tax evasion. The emotions associated with audits and sanctions influence an agent’s behavior as a driving force in business character. Emotions can be postulated to be related to evasion or compliance. Individuals often experience anticipatory emotions when they weigh the risk of being exposed as having lied about financial reports and the relief that comes if the audit is not done at all. Emotions are deemed to be escalated if details surrounding deception by business corporates are laid out to the public. Importantly, evaders who are detected often get tossed in emotions full of shame, self-blame and guilt. This is actually the expectation of authorities the following public expose. Since many people would not risk to damage their reputation, this would have a very big impact on future attempts to comply with laid down regulations.
The laboratory experiment is original in the sense that it highlights the physiological aspects of emotional processes and how they are influenced by income reporting activities. In the benchmarked context of the experiment, each of the participating subjects is issued with an income that is taxed at a rate that is very proportional. The subject is however given the liberty to choose how much of his income he is going to report. Each subject is faced with the probability of going through an audit which will ultimately lead to a penalty if they are found to have underreported. The technique of picture display follows the exact same procedure as cheating will be revealed through the display of the portrait of a dishonest subject. This technique allows the developers of this experiment to find the difference between the impacts of non-monetary versus monetary sanctions while some factors such as the expected monetary return are largely held constant. Skin conductance response otherwise labelled SCR is used to quantify the emotional arousal under different circumstances. This is drawn from the principle of electro dermal activity of the skin that is directly influenced by the sympathetic nervous system. This skin system is also altered by physiological responses among them emotional arousal. Further, affective responses are used to gauge the level of emotional arousal under different scenarios.
Data and findings
There were several findings just as the variables in the experiment. Subjects who had higher SCR rates were predicted to be more inclined towards evading and actually evade more.
Emotional arousal during the time of the audit was increased due to the fact that the subjects dreaded both monetary and non-monetary sanctions as well as other losses (Coricelli, Joffily and Montmarquette 234).
The results of this experiment explore the fact that, despite the environment of the laboratory not being 100% sterile, it is still possible to capture the emotions of the subjects due to factors such as social stigma in the laboratory setting. Displaying the picture of the evader following a successful audit helps in deterring cheating and promotes compliance. This experiment has greatly highlighted the importance of the principle of tax morale. It is evident that people will not only fear the monetary losses following an audit, they importantly fear the moral implications of such an exposure. This finding is significant in the sense that it has highlighted that tax evasion could possibly be reduced or deterred to close to zero levels by escalating the emotional and moral cost of such an irregularity.
Both heuristics and nudge approach in decision making are important concepts that can be highlighted from this experiment.
Heuristics
Heuristics is a concept borrowed from psychology and heavily applied in experiments that are deemed subjective such as the one above. Heuristics are defined as efficient yet simple rules through which people draw their judgment of an activity in question while aiming at making an improved decision (Davide 41). This aspect involves focusing on one item in a complex question while ignoring all the other issues in the whole problem. While a holistic approach seeks to focus and solve all issues, heuristics highlight the need to focus on just one item in the list of problems.
The concept of heuristics is relevant to this experiment. Here the question in focus is tax evasion and how to deter it. This experiment however chooses to focus on the emotional aspect of tax evasion and the possible ways to manipulate emotions to deter dishonest behavior. Such is the case with the public display of a portrait of an individual found to be dishonest. The finding is that the subject’s emotions shoot high and that they are more likely to be more inclined towards compliance in future. Rational choice theory otherwise called choice theory is a standard framework for analyzing and understanding economic and social behavior. This theory tends to focus and highlight on what things determine individual choices. It is, therefore, true that subjects often have a choice in a long list of preferences. In this experiment, the subjects have a choice on whether to be honest about their reporting or not based on certain consequences of doing so. The consequences in the experiment have been established as variables and the scholar behind the experiment expects to note the effects of the individual consequences on individual behavior.
Nudge approach
Nudge is a theory both in economics and political science that tends to advance the concept of indirect suggestions and positive reinforcement in trying to encourage compliance among subjects. The non-forced compliance is achieved though the exploitation of things such as decision making with either incentives of negative consequences. This concept seeks to influence human behavior without having an impact on their economic incentives.
The experiment above seeks to deviate from the monetary and non-monetary sanctions in trying to influence tax compliance. The financial aspect of the subjects in this experiment is held constant while attempts are made to influence their emotion and see whether exploiting their emotions affect their likelihood to comply. As the nudge approach suggests, a nudge is basically not a mandate but sort of incentive. In the experiment, people are given the chance to announce their taxes with the knowledge that an audit may probably be done. Those who fail know that their portraits will be displayed publicly and this influences the choice of the subjects who choose to comply rather than going through the emotional turmoil of having their pictures displayed in public.
The nudge approach is important in the study of human rationality. This theory focusses on how various aspect of decision making are influenced by the result of such decisions (Davide 16). The nudge theory suggests a way of influencing peoples’ decisions indirectly as opposed to the traditional means of using tactics such as legislation and enforcement. This concept means that the subjects have the liberty to choose what decision they are making without the fear of the legal or financial implications. In the experiment, the subjects only face the consequence of soiling their public image possibly due to dishonest behavior. The directors of the experiment are interested in knowing whether the emotional aspect drawn from a public expose’ helps shape people decision on tax compliance.
Works Cited
BIBLIOGRAPHY Coricelli, Giorgio, et al. “Cheating, emotion, and rationality: an experiment on tax evation.” Experimental Economics 13(2) (2010): 226-247. Print.
Davide, Secchi. Extendable Rationality: Understanding Decision Making in Organizations. New York: Springer, 2011. Print.