Kori Sandberg

August 30, 2017

MGMT 495
Ethical Decision Making
More needed than good intentions

Difficulties in Ethical Decision Making Review

Good intentions arent always enough to keep finance professionals making the most
ethical and well intentioned decisions. There are many factors that contribute to the integrity of
these individuals. Some of these professionals can become ethically trapped or pressured into
making the unethical decision, or decisions based on their own self interests. Some of these
factors that make up behavioral finance are as listed:

Obedience to authority
According to Stanley Milgrams study, the test subjects were told to administer
increasingly painful shocks to another person, simply because they were told to do so by a
person in a lab coat who appeared to be a superior. The study found that if individuals were
told to do something by a superior that they were more influence able if told or insinuated to do
something unethical by their boss than on their own accord. Also, a desire to please and other
incentives give some people the drive to attempt these unethical actions on their own.

Conformity Bias
The average person typically conforms to social norms to stay out of the spot light and
out of danger to their social status. The article states that conformity bias strongly pushes people
to conform their judgments to the judgments of their reference group, which then delivers
psychic payoffs when observed by peers, inevitably the desire to conform becomes stronger if
the audience is friends or co workers. Everyone else is doing it seems to be the defense that
those accused of unethical conformity tend to use to justify their actions, but to what extent are
they really justified? The truth lies in the testimonies of those guilty of conforming in the
workplace even when unethical just because it was the norm and straying from that could
potentially cost these employees their jobs.

Incrementalism
Known as the slippery slope, some unethical behaviors occur unconsciously and over
long periods of time. This lowering the bar happens in miniscule changes over time to an
individuals ethicality of behavior and decision making. This process usually happens in stages
and most often in tandem with peers and coworkers.

Groupthink
Research psychologist Irving Janice came up with the name groupthink, this is the
deterioration of moral judgment that comes from the pressure from what is happening within the
group. When individual thinking is replaced with group thinking, bad judgment and poor
decisions involving ethics are made. These risks get more severe when there are more people in
on them in which provide more support and assurance of success.

1
Over optimism
In some cases, being overly optimistic can lead to irrational choices. More particularly
being overly optimistic can influence poor decisions and unethical decision making; this happens
in all areas of business. These people feel that the bad things happen to other people, thus they
begin to believe their over optimism as truth and therefore begin to believe it.

Overconfidence
Often, overconfidence can lead to poor ethical judgment. Some financial executors and
analysts think they are better than their peers thus causing an inflated sense of invulnerability and
often leading to unethical decision making among other foolish choices.

Self-serving Bias
One of the most difficult decision biases mentioned in this article is self serving bias. Self
serving bias is basically the tendency for people to gather information in a self serving manner.
Some individuals inherently remember information that supports their personal positions
opposed to those that are contrary. The article states that usually the greater the self-serving
incentive, the stronger its influence on objective judgment. Meaning the greater the rewards, the
more risk people are willing to take, and their actions may be completely justifiable to
themselves.

Framing
Essentially, framing is the way an idea or concept is presented. For example, people
would rather buy 85% ground beef, than purchase 15% fat beef. Framing a sentence or phrase
changes the original statement to present it in a way that appeals to individuals and convinces
them to acquiesce; where the original statement may be less desirable, this framing technique is
commonly used in our society and in the business/marketing world daily.

Sunk Costs
One good example of sunk costs is when managers of companies pour tons of money into
developing a new product, then have great difficulty abandoning the product in the event of
safety failure or other issues. Escalation of commitment is associated with sunk cost, people feel
obligated to fulfill their prior commitments only because they would be wasting money
otherwise, or they frequently become irrational in decision making.

The tangible, the close, and the near term

In the business world, financial professionals are faced with making the right ethical
decision every day. The article uses stock analysis for one example to explain this concept, if the
analyst supports the sell position on a companys stock this could cost the analyst and his
company (and friends) the revenues that could be generates, on the other hand, an analyst who
recommends the buy position unjustifiably would receive a loss to the many investors who are
potentially faceless to this particular individual. This decision puts the analyst in a difficult
position. My take on this section is, the closer a person is to the consequences of the decision the
more leery he is to make the wrong one.

2
Loss Aversion
This section of the article refers to loss aversion and the endowment effect as a powerful
combination that causes individuals to make irrational and unethical decisions in order to protect
their endowment. Examples of loss aversion in the financial world would be not reporting a loss
on statements or sudden decrease in earnings. The bottom line is humans dont like losing
anything that they perceive valuable, and will likely to at some point try to avert that loss.