Ethical Decision Making:Ethical Decision Making:Heuristics and BiasesHeuristics and Biases

William J. WilhelmWilliam J. Wilhelm

College of BusinessCollege of BusinessIndiana State UniversityIndiana State University

Used by permission

The Four Components of Moral Behavior (Rest et al, 1999)

1. Moral sensitivity

2. Moral judgment

3. Moral motivation

4. Moral character

Steps in making a judgment

1. Problem recognition

2. Identification of alternative courses of action

3. Evaluation of alternative courses of action

4. Estimation of outcome probabilities

5. Calculation of expected values

6. Justification of course of action chosen

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.

ETHICAL Evaluation Tools

Conventional moral rules and codes

Universal duty towards others

Greatest good for the greatest number

Characteristics of a good person

Kant’s categorical imperative

Bentham & Mill’s utilitarianism

The Golden Rule, laws, corporate codes of ethics, etc.

Aristotle’s virtue theory: bravery, honesty, temperance, generosity, justice, pride.

1. Problem recognition

2. Identification of alternative courses of action

3. Evaluation of alternative courses of action

4. Estimation of outcome probabilities

5. Calculation of expected values

6. Justification of course of action chosen

•Conventional rules and laws•Categorical imperative•Utilitarianism•Virtue theory

Steps in making a judgment

Steps in making a judgment

1. Problem recognition

2. Identification of alternative courses of action

3. Evaluation of alternative courses of action

4. Estimation of outcome probabilities

5. Calculation of expected values

6. Justification of course of action chosen

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.

Rational Actors? Optimal Decision-Making Model?

Conflicting values Individual

Social

Religious

Organizational

Cultural

Other

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

Biases and heuristics that can cloud ethical decision making

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

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.

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

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.

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.

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.

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.

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)

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

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.

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.

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.

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

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.

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.

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.

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.