Wall Street Journal
Wednesday, August 28, 2002

 By HOLMAN W. JENKINS, JR.

                                  How Could They Have Done It?

                                  Did a bacillus descend from space and make Enron senior
                                  employees in equal parts evil and stupid?

                                  Whatever else it was, the activities of Enron's finance
                                  department -- people like Andrew Fastow and Michael
                                  Kopper, with the presumed if uncertain participation of
                                  CEO Jeff Skilling -- amounted to a colossal misjudgment.
                                  Their company is bankrupt instead of thriving. Its senior
                                  employees are jobless, their wealth is under attack and
                                  they face criminal prosecution and jail.

                                  Presumably these are not the results Enron executives
                                  intended.   Laboring in the business schools
                                                   have been a breed of researcher
                                                   known as "behavior decision
                                                   theorists," who would be inclined
                                                   to see in Enron a saga of
                                                   incompetence as much as cupidity.
                                                   A widely-noted contribution to the
                                                   field was "Ethical leadership and
                                                   the psychology of decision
                                                   making," which appeared in the
                                                   January 1996 edition of Sloan
                                                   Management Review, by
                                                   Harvard's Max Bazerman and
                                  Northwestern's David Messick.

                                  Their clinical point of view, on first glance, will infuriate
                                  those who believe moral condemnation is the end of
                                  analysis: "Unethical business decisions may stem not from
                                  the traditionally assumed trade-off between ethics and
                                  profits . . . but from psychological tendencies that foster
                                  poor decision making."

                                  Let's say right off that not everybody buys this stuff. It's
                                  based on psychological studies of decision making in
                                  controlled games, often involving the handy fodder of the
                                  grad student population. These experiments are said to
                                  reveal systematic deviations from rationality when people
                                  evaluate courses of action.

                                  "There is a tendency to reduce the set of possible
                                  consequences or outcomes to make the decision
                                  manageable. In extreme cases, all but one aspect of a
                                  decision will be suppressed, and the choice will be
                                  made solely on the basis of the one privileged
                                  feature."

                                  As CEO, Jeff Skilling had set a goal of ridding Enron's
                                  balance sheet of poorly-performing or volatile assets. Did
                                  he decide at some point (well before his Congressional
                                  testimony) that it would be better not to know exactly how
                                  Mr. Fastow, his protege, was achieving his desired goal?

                                  Did Mr. Fastow become preoccupied with designing
                                  structures that he could personally benefit from to the
                                  exclusion of other considerations? Chewco and RADR,
                                  two of the partnerships formed in 1997, arguably
                                  produced real benefits for Enron. By the time we get to
                                  Southampton, initiated in 2000, raking off fees for Mr.
                                  Fastow and selected others seems to have become the
                                  sole purpose. How could he imagine that somebody
                                  would not blow the whistle, if only out of resentment at not
                                  being given a cut?

                                  "One reason we think we are relatively immune to
                                  common risks is that we exaggerate the extent to
                                  which we can control random events."

                                  Enron's stock price was the helium that kept the
                                  partnerships airworthy. If the stock price remained high,
                                  Enron's hidden debt exposure would not have to be
                                  realized. But anybody in business knows that 99% of the factors influencing a company's stock prices are out of
                                  management's control.

                                  People overestimate the likelihood that they will experience "good" future events and underestimate the
                                  likelihood of "bad" future events.

                                  Mr. Fastow had done brilliantly in school, married an heiress, and attached himself to Mr. Skilling, the rising star at
                                  Enron, who put Mr. Fastow in the CFO's seat at age 36. He was obviously somebody who could take risks without
                                  really taking risks. Everything would always come up roses for him.

                                  People believe their wants and demands are "fair" and "deserved."

                                  A Journal article earlier this year quoted unnamed Enron "insiders" as suggesting that any monies Mr. Fastow steered
                                  into his own pockets were a "pittance" compared to the benefits he created for Enron.

                                  People are "erroneously confident"' in their knowledge and underestimate the odds that their information or
                                  beliefs will be proved wrong. They tend to seek additional information in ways that confirm what they already
                                  believe.

                                  Mr. Skilling's surprise resignation a year ago came not long after he dismissed an analyst's question on a conference call
                                  by referring to a body part. Even allowing for the disgruntlement of ex-colleagues, the overwhelming picture painted of
                                  the Skilling-Fastow-Kopper circle's operating style is arrogant, secretive and exclusive. Anyone who questioned their
                                  methods was dismissed as not "getting it."

                                  We're used to people making disastrous decisions in their personal lives, where they have complete sovereignty. We're
                                  used to people exhibiting obnoxious qualities to their own detriment. But business executives make decisions as a group
                                  and need the support of their colleagues: they create paper trails and have to explain themselves.

                                  Maybe it's too much to ask them to be invariably honest but we would expect them not to be self-defeatingly stupid. In
                                  most cases thieves either plan to get away with it or think they aren't stealing. Enron executives seem to have believed
                                  they weren't stealing.

                                  The purpose here is not to make psychological excuses but to get at the element of extraordinary miscalculation. On a
                                  final note, Prof. Bazerman (who bears no responsibility for the use I've made of his 1996 article) takes issue with those
                                  who, in the wake of Enron, have been clamoring for business schools somehow to teach remedial ethics to their
                                  grown-up students. Surely that's a job for parents and churches when children are still children.

                                  What business schools can do, he says, is teach students to be aware of the systematic errors in people's thinking that
                                  can start a basically normal person "down the slippery slope to unethical decisions."

                                  Updated August 28, 2002 12:33 a.m. EDT