Cycles of Corporate Fraud: a Behavioural Economics Approach

We analyse the combined effects of economic, behavioural, psychological, emotional, and psycho-analytical factors on the managerial propensity to commit corporate fraud. Becker (1973) suggested that criminals and fraudsters perform a fully-rational cost-benefit analysis of crime commission, an approach which advocates tougher financial regulation and stronger punishment threats to deter crime. Meanwhile, behavioural economics and Freudian psycho-analysis proposes that behavioural, psychological and emotional factors play a key role in the incidence of corporate fraud. We develop a behavioural game-theoretical and Freudian psycho-analytical framework of corporate fraud and consider the effect of a Freudian super-ego, acting as a moral compass, on managerial fraud. Furthermore, we analyse the contagious spread of fraud across an organisation from unethical to ethical managers. The chapter concludes with an in-depth review of policy makers and practitioners as they are beginning to appreciate and incorporate the behavioural economics approach in developing better policies to address corporate fraud.