1. Ethical Decision Making: Indiana State University
Used by permission
Ethical Decision Making:
Heuristics and Biases
William J. Wilhelm
College of Business
Indiana State University
Competing values in organizations

2. The Four Components of Moral Behavior (Rest et al, 1999)
Moral sensitivity
Moral judgment
Moral motivation
Moral character
Moral sensitivity (interpreting the situation, role taking how various actions would affect the parties concerned, imagining cause-effect chains of event, and being aware that there is a moral problem when it exists)
Moral judgment (judging which action would be most justifiable in a moral sense)
Moral motivation (the degree of commitment to taking the moral course of action, valuing moral values over other values, and taking personal responsibility for moral outcomes)
Moral character (persisting in a moral task, having courage, overcoming fatigue and temptations, and implementing subroutines that serve a moral goal).
Morality consists of ALL of these components (capacities).
If one is missing, the individual will not behave morally except by chance.

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.
Kant’s categorical imperative
NORMS of behavior - PRESCRIPTIVE
ANALYTICAL
VALUES
Bentham & Mill’s utilitarianism
Aristotle’s virtue theory: bravery, honesty, temperance, generosity, justice, pride.

6. Steps in making a judgment
Conventional rules and laws
Categorical imperative
Utilitarianism
Virtue theory
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
BIASES – a preference, inclination or predisposition that inhibits impartial judgment
HEURISTICS – ways in which we formulate speculations in order to investigate and solve a problem. STEP-BY-STEP PROBLEM SOLVING TECHNIQUES

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.
Behavioral research has shown…

9. Conflicting values Individual Social Religious Organizational Cultural
Other
Organizational – formal and informal – power coalitions, politics, management overreach
Other group affiliations: childhood friends, neighborhoods, gang affiliations

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
References page
From: Teaching ethics, heuristics, and biases. Robert Prentice (2004) Journal of Business Ethics Education, 1(1), 57 – 74.

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.
Enron-era scandals – many actors pleaded that they were “just following orders”
Poneman & Gabhart (1994); DeZoort & Lord (1994); Peecher (1996) –
auditors increasingly problematic behavior directly related to length of service with firm – pressured inappropriately from above

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
Asch experiments -- 3 lines the same, fourth line different; confederates choose wrong line, respondent has difficulty disagreeing
Enron tell-all books: many employees bought into Enron's fast-and-loose corporate culture without fully recognizing the ethical implications of company practices.
People are more likely to undertake unethical actions in the workplace and elsewhere if peers are engaging in similar behavior.

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.
Sometimes lawyers and auditors get into bed with crooked clients without fully realizing it

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 firm’s conditions and prospects.
Valuation of assets – Enron off balance sheet special purpose entities (SPEs)

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.
People's confidence in themselves translates into confidence in the ethical correctness of their acts and judgments.
No wonder that so many Enron-era scandal figures expressed surprise that anyone would question the morality, let alone legality, of their nefarious activities.
Dennis Koslowski contends that he did nothing wrong in his extravagant spending on personal gratification at Tyco as he stated on Sixty Minutes recently.

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.
(Most Important)
Did Andy Fastow believe that he deserved the millions of dollars he took out of the Enron special purpose entities (SPE) in exchange for his creative efforts in taking debt off Enron's books?
Did Bernie Ebbers think he was really worth of the hundreds of millions of dollars he secretly took out of WorldCom?
Did Dennis Koslowski believe that he was within the parameters of his deserved perquisites to spend over $2 million on his wife’s birthday party?
Did David Duncan believe that his commissions from the Enron audit by his company (Arthur Anderson) justified signing off on bogus SPEs.
Research on self-serving bias suggests that they did.
AUDITING SERVICES vs CONSULTING SERVICES REVENUES

17. Self-Serving Bias – con’t.
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 company’s successes (and less for failures)
CONFIRMATION BIAS - Studies about the safety of smoking. Asbestos. Dalkon Shield.
CAUSAL ATTRIBUTION THEORY - People have a tendency to attribute to themselves more than average credit for their company's or team’s successes and less than average responsibility for its failures.
The greater the subjectivity and the fewer the facts in a situation, the greater the potential for errors in judgments of fairness. Babcock (1995) conducted an experiment with law students where they were given materials from a real case and asked to hypothetically represent one side. The students were asked what they thought a fair settlement was and how much they thought the judge in the case had probably awarded. The students’ judgments as to fairness and their estimate as to outcome were dramatically affected by whether they had been assigned to represent the plaintiff or the defendant.
Over billing in the defense industry: Haliburton
CREDIT CARD CHARGES (Citibank at congressional hearings), SUB-PRIME LENDING PRACTICES.
Self-serving bias can create obstacles to successful negotiations. Negotiators are unable to form a realistic opinion regarding the strengths and weaknesses of their bargaining position. Negotiations themselves may appear ethically questionable.

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
For example, people would rather buy potato chips labeled 75% fat-free than identical chips labeled 25% fat.
Defense attorneys and prosecutors often "keep score" of their "wins and losses."
If a CEO frames his or her responsibility only in terms of maximizing shareholder value, we should not be surprised to find that those officers and directors are more likely to neglect such niceties as honesty, personal integrity, and commitment to the mutual benefit of all the participants in the corporate enterprise.
“Chainsaw” Al Dunlop – Sun Electronics, Scott Paper

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 another’s errant behavior, then covering up for another, then participating, then conspiring.
German doctors who practiced euthanasia of "undesirables" -- initially just brought to the place where the work was done, next they were asked to sign a document, then to supervise a "mercy killing," later asked to do the killing.
People involved in unethical business decisions more often slide down a slippery slope incrementally and in tandem with their peers in an organization.

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.
Whereas confirmation bias is searching for information to confirm one’s decision as right, cognitive dissonance is screening out information that tends to contradict their positions.
Makes it difficult to process new, contradictory information.
Morton Thiokol Challenger O rings
Can delay lawyers from realizing their clients are crooks.
Auditors – “My client’s financial statements are accurate.”
Employees – “My employer is innovative.”
INNOVATIVE MARKETING? Student Loan Xpress kickbacks to university financial aid officers.

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.
Managers of companies that have poured huge amounts of resources into a particular product or project will have great difficulty scrapping that product when evidence of safety problems surface.
For example, the Pentagon's behavior in the Vietnam War, Iraq War.
Products: Pinto, Vioxx, Fen Phen, Dalkon Shield,
Antithesis – Tylenol and James Burke

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
Marketers and developers of products with safety concerns find it tremendously difficult to decide to pull the plug on a product (even a Ford Pinto), lay off employees working on the product, and damage the company's profits in the short-term when the potential injuries are hypothetical at this point, temporally-distant, and visited upon mere statistical victims.
Vioxx vs. Tylenol
S & L scandal of 1980s - 1,000 savings and loan institutions failed in the largest and costliest venture in public misfeasance, malfeasance and larceny of all time. WHO WERE THE VICTIMS?

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.
Discarding and dumping pollutants into the environment is often a short-term solutions of significantly less cost financially to companies, but with greater long-term damaging effects to the environment.

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.
For example, companies may cover up damning evidence about unsafe products after safety problems have been detected:
BIG TOBACCO - The leaking of thousands of documents by disgruntled Brown & Williamson clerk Merrell Williams in 1994 cast new light on the inner workings of the cigarette makers.
In a 1996 deposition, Brown & Williamson's assistant general counsel (J. Kendrick Wells III) testified that during the past 15 years, through scores of lawsuits, the firm released only between 500 and 800 documents; the rest of the potentially tens of thousands of documents requested by plaintiff's lawyers, including all relating to several key research projects, were stored under the attorney-client privilege.
Dalkon Shield
END OF HEURISTICS AND BIASES. NEXT SLIDE - LIMITATIONS

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.
Limitations in effective methods to debias people.

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. THANK YOU
QUESTIONS