From time to time, we hear of price-fixing scandals, whether it is Libor rates or the future commodity trades in uncertain times. Can this be eradicated?

In his seminal book “The Wealth of Nations,” Adam Smith said, “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

In today’s investment banking world, there are so-called “Chinese Walls,” which refers to an ethical concept that acts as a virtual barrier prohibiting groups or individuals within the same organization from sharing information that could create a conflict of interest.

If this is so, how come price-fixing and manipulation occur? While the workplace can be closely monitored using the “Chinese Wall” practices, this does not stop collusion outside the work environment in an informal social setting.

Price fixes are not unique to financial markets, and there has been evidence of rigged football and cricket matches.

In the 1990s, agricultural company Archers Daniel Midland was caught in a severe price-fixing scandal for lysine. Several of its senior executives were convicted and went to jail.

In 1996, ADM also pleaded guilty to a price-fixing conspiracy in the citric acid market. The company was sentenced to paying $100 million for its role in the two scandals, the highest ever-antitrust fine in corporate America at those times.

Some psychologists have pointed out that it is easy to structure environments that induce most people to cheat.

If, say, people have the illusion of anonymity and a sense they are less likely to be caught doing wrong, the incidence of cheating increases.

People do not even need to be told that their identities are hidden. The perception of greater anonymity increases the lure of cheating.

Mental and physical stress at work can also be a factor for potential market fraud.

The self-control framework predicts that being mentally tired can lead people to cheat more because they have fewer mental resources to enforce ethical and moral rules.

Those market participants, who were high in moral identity, are more likely to resist the temptation to cheat, even when feeling emotionally and physically depleted.

Is there hope for better behavior? Giving quality time off to stressed-out employees might be the first step. But unfortunately, sheer human errors like the fat finger syndrome can sometimes lead to substantial losses.

Recently, a Citigroup trader inadvertently added an extra zero to his trade done from home during a holiday, which led to a flash crash in European stocks, wiping out around $322 billion at one point, and a potential $50 million loss to Citigroup.

Generally, people who contemplate cheating respond to incentives and psychological cues. Therefore, increasing the perceived likelihood of being caught appears to reduce the frequency of cheating.

Disappointment, however, awaits those who hope that stronger criminal sanctions will reduce incidents of price-fixing. What does give some potential cheaters pause for thought is the possibility of strong social sanctions associated with embarrassment to their families, loss of social standing and damage to careers?

In the Gulf, dishonoring the family name of swindlers and abandoning them from the community could be a massive deterrent for those contemplating cheating.

But being caught and punished with jail sentences might not be the deterrent that keeps some from cheating and price manipulation.

Clearly, the then infamous executives of Archer Daniels Midland, who were convicted of price-fixing and sent to prison, were not deterred by the prospect of jail.

The same applies to the appropriately named Bernard Madoff, who ran the largest Ponzi scheme in history, and died in prison in 2014 with his wealth gone and family life destroyed.

Madoff, known as Bernie, was a former chairman of the American Nasdaq stock exchange and was regarded for years as an investment sage.

But unbeknown to his thousands of victims, he was running a Ponzi scheme that wiped out at least $17.5 billion in savings.

Imposing a 150-year sentence in 2009, Judge Denny Chin called Madoff’s crimes “extraordinarily evil.” His criminal behavior devastated the lives of his victims, leading to suicides, bankruptcies and home losses.

In a newspaper interview, his ex-wife Ruth said that the money was secondary. Psychological issues were paramount. She explained that Madoff had told her that he “got stuck,” which she interpreted to mean that he lacked the courage to face his actions, especially once the scope of his deception became large.

There are important lessons here about cheating being a slippery slope with the psychological issues gaining the upper hand over time and people taking impudent risks when the Sword of Damocles of sure loss hangs over their heads. Only, in Bernie Madoff’s case, the sword was a double-edged one.

• Dr. Mohamed Ramady is a former senior banker and Professor of Finance and Economics, King Fahd University of Petroleum and Minerals, Dhahran.