Ethical Decision Making

1
Ethical Decision Making Heuristics and
Biases William J. Wilhelm College of
Business Indiana State University
2
The Four Components of Moral Behavior (Rest et
al, 1999)

• Moral sensitivity
• Moral judgment
• Moral motivation
• Moral character

3
Steps in making a judgment

• Problem recognition
• Identification of alternative courses of action
• Evaluation of alternative courses of action
• Estimation of outcome probabilities
• Calculation of expected values
• Justification of course of action chosen

4
BUSINESS Evaluation Tools.

• For example, in management decisions we use tools
  such as
• cost-benefit analysis
• feasibility analysis
• time-to-market analysis
• net present value
• strategic prioritization
• etc.

5
ETHICAL Evaluation Tools

• Conventional moral rules and codes
• Universal duty towards others
• Greatest good for the greatest number
• Characteristics of a good person

The Golden Rule, laws, corporate codes of ethics,
etc.
Kants categorical imperative
Bentham Mills utilitarianism
Aristotles virtue theory bravery, honesty,
temperance, generosity, justice, pride.
6
Steps in making a judgment

• Problem recognition
• Identification of alternative courses of action
• Evaluation of alternative courses of action
• Estimation of outcome probabilities
• Calculation of expected values
• Justification of course of action chosen

7
Steps in making a judgment
Biases and other influences on perceptions and
decision making (heuristics)

• Problem recognition
• Identification of alternative courses of action
• Evaluation of alternative courses of action
• Estimation of outcome probabilities
• Calculation of expected values
• Justification of course of action chosen

8
Rational Actors? Optimal Decision-Making Model?

• People are plagued more by bad decision making
  than ethical breaches in reasoning.
• Cognitive and behavioral susceptibilities might
  lead (often unwittingly) to unethical decision
  making.
• Overwhelming evidence that people do not always
  make decisions in a rationally optimal manner
  (Kahneman Tversky, 2000).
• Various heuristics and biases lead most people to
  systematically diverge from optimal
  decision-making.

9
Conflicting values

• Individual
• Social
• Religious
• Organizational
• Cultural
• Other

10
Biases and heuristics that can cloud ethical
decision making

• Obedience to authority
• Social proof
• False consensus effect
• Over optimism
• Overconfidence
• Self-serving bias
• Framing

• Process
• Cognitive dissonance
• Sunk costs
• The tangible and the abstract
• Time-delay traps
• Loss aversion

11
Obedience to Authority

• "Just following orders" ("Good Nazi" defense)
• Stanley Milgram (1963) experiments.
• Students need to be aware of this potentially
  corrosive influence from both formal lines of
  authority and non-formal authority.

12
Social Proof

• "Everyone else is doing it
• Pressure to conform with others in the group of
  co-employees and/or friends.
• Many behaviors are caused by external influences
  rather than their own disposition.
• Obscenely-high executive salaries?
• Options backdating
• Insider trading

13
False Consensus Effect

• Thinking that other people think the same way
  that we do.
• Reinforces inclinations to follow authority and
  submit to peer pressure.
• Honest people will tend to believe that those
  they interact with are honest as well.
• Employees may get involved in some wrongdoing
  themselves but may not fully recognize the
  ethical implications of their acts.

14
Over-optimism

• Humans are often overly optimistic about
  OUTCOMES.
• Often leads to irrational beliefs.
• Divorce rate at 50 -- newlyweds tend to rate
  their own chances of divorce at 0.
• Basis for unethical decisions corporate
  disclosure fraud cases could be the result of
  irrationally optimistic views of a firms
  conditions and prospects.

15
Overconfidence

• People are often irrationally overconfident
• Deals with perceptions about INDIVIDUAL
  CAPACITIES.
• People tend to rate themselves as well above
  average in most traits, including honesty.
• Business people tend to believe that they are
  more ethical than their competitors.
• Overconfidence in one's own ethical compass can
  lead people to accept their own decisions without
  serious reflection.

16
Self-Serving Bias

• The belief in deserved rewards for one's self.
• Affects (unconsciously) information that people
  seek out to confirm rather than disconfirm
  evidence.
• Affects how people remember information.
• Affects judgments of fairness.

17
Self-Serving Bias cont.

• Confirmation bias searching for information
  that supports a conclusion and ignoring
  information that disconfirms it.
• Belief persistence people tend to persist in
  beliefs they hold long after the basis for those
  beliefs is substantially discredited.
• Causal attribution theory people tend to
  attribute to themselves more than average credit
  for their companys successes (and less for
  failures)

18
Framing

• People's risk preferences change with context -
  depending on whether an option is framed in terms
  of potential loss or potential gain.
• The self-serving bias may lead an actor to frame
  decisions in such a way as to lead to ethically
  questionable conclusions.
• Example Maximizing (shareholder) value versus
  stakeholder interests

19
Process

• People sometimes make much different decisions
  depending upon whether they are presented with a
  particular big decision, or a series of
  incremental decisions leading to the same point.
• Slide down a slippery slope incrementally
• Example Looking the other way during anothers
  errant behavior, then covering up for another,
  then participating, then conspiring.

20
Cognitive Dissonance

• Uncomfortable psychological inconsistency caused
  by incompatibility between two conflicting
  beliefs or attitudes
• Once people have made decisions or taken
  positions, they will cognitively screen out or
  reject information which undermines their
  decisions or contradicts their positions.

21
Sunk Costs

• People tend to stick by decisions into which they
  have sunk significant costs.
• Sunk costs can lead to an escalating commitment.
• New product development examples
• Individual job investment job, salary,
  perquisites are not easily parted with.

22
The Tangible and the Abstract

• Decision-making is impacted more by vivid,
  tangible, contemporaneous factors
• Less by factors that are removed in time and
  space.
• Designers and marketers of new products with
  safety problems

23
Time-Delay Traps

• When an action has both short-term and long-term
  consequences, the former (short-term) are much
  easier for people to consider.
• People subject to this time-delay trap in
  decision-making often prefer immediate to delayed
  gratification.

24
Loss Aversion

• People detest losses more than they enjoy gains,
  about twice as much.
• Endowment effect - the notion that we easily
  attach ourselves to things and then value them
  much more than we valued them before we
  identified with them.
• People will make decisions in order to protect
  their endowment that they would never have made
  in the first place to accumulate that endowment.

25
Limitations

• Evidence shows that some of these tendencies are
  very difficult to debias, even with experience
  and training.
• Nonetheless, not all attempts to debias have been
  failures.
• Common sense dictates educating students and
  employees about these biases and heuristics.

26
Why teach about heuristics and biases?

• Sensitize employees to various forms of ethical
  dilemmas.
• Educate employees regarding their own cognitive
  and behavioral susceptibilities
• Educate employees about potential non-formal
  organizational influences and pressures
• Inoculate employees against weaknesses in their
  own decision-making processes.
• Largely ignored in business school and law school
  classrooms in subjects of professional ethics.

27
(No Transcript)
28
(No Transcript)