Regarding "penalizing honesty," I think it actually rewards honestly quite greatly—because of the Honor Code's importance in Caltech culture (i.e. one of the undergrad application essays is specifically about the Honor Code), it means that everyone gets to benefit from take-home exams.
I guess what I'm trying to say is that the "implied notion that Caltech students are... honest" is, in my experience, largely true (possibly because Caltech tries to select people who think the Honor Code is good from the get-go).
Clearly, any society collectively benefits from honesty, whereas an honest act is, at least in a strict game-theoretic view, a loss to the individual in the short term.
The question "Are you honest?" does not necessarily filter out dishonest people. (Incidentally, I always felt like I would not have been admitted to Caltech as a student.)
I guess what I'm trying to say is that the "implied notion that Caltech students are... honest" is, in my experience, largely true (possibly because Caltech tries to select people who think the Honor Code is good from the get-go).