Ethical Fading: How Good People Do Bad Things...So Easily

News Brief

By Cydney Posner

Following is a link to an interesting op-ed from The New York Times by two business professors regarding the psychology of ethical lapses. 

They argue that, while regulators and others tend to focus on corruption and other intentional wrongdoing, the unethical behavior that occurs "because people are unconsciously fooling themselves" can be equally damaging to society. This type of unethical conduct can occur as a consequence of subliminal motives: people "overlook transgressions — bending a rule to help a colleague, overlooking information that might damage the reputation of a client — because it is in their interest to do so." Or, the ethical issues can simply recede into the background: "When we are busy focused on common organizational goals, like quarterly earnings or sales quotas, the ethical implications of important decisions can fade from our minds. Through this ethical fading, we end up engaging in or condoning behavior that we would condemn if we were consciously aware of it." Legal reforms, the authors contend, should take these unconscious influences into account. They might also agree that, to the extent possible, conscious efforts need to be made to bring the ethical component of decision-making back into prominence.

The authors argue that the "underlying psychology helps explain why ethical lapses in the corporate world seem so pervasive and intractable. It also explains why sanctions, like fines and penalties, can have the perverse effect of increasing the undesirable behaviors they are designed to discourage.

"In one study, published in 1999, participants were asked to play the role of a manufacturer in an industry known for emitting toxic gas. The participants were told that their industry was under pressure from environmentalists. To ward off potential legislation, the manufacturers had reached a voluntary but costly agreement to run equipment that would limit the toxic emissions. Some participants were told they would face modest financial sanctions if they broke the agreement; others were told they would face no sanctions if they did.

"An economic analysis would predict that the threat of sanctions would increase compliance with the agreement. Instead, participants who faced a potential fine cheated more, not less, than those who faced no sanctions. With no penalty, the situation was construed as an ethical dilemma; the penalty caused individuals to view the decision as a financial one.

"When we fail to notice that a decision has an ethical component, we are able to behave unethically while maintaining a positive self-image. No wonder, then, that our research shows that people consistently believe themselves to be more ethical than they are."

According to the authors, ethical fading also affects our attitudes toward the unethical behavior of others. They contend that corporate boards, auditing firms, credit-rating agencies and others should have recognized and reported the "damning data" that was readily available to these gatekeepers before the financial crisis hit. It was not reported, they assert, "at least in part because of ‘motivated blindness' — the tendency to overlook information that works against one's best interest. Ample research shows that people who have a vested self-interest, even the most honest among us, have difficulty being objective. Worse yet, they fail to recognize their lack of objectivity.

"In one experiment for a study published last year, student participants were asked to estimate a fictitious company's value. They were assigned one of four roles: buyer, seller, buyer's auditor or seller's auditor. All participants read the same information, including an array of data to help them estimate the firm's worth. Not surprisingly, sellers provided higher estimates of the company's worth than buyers did. More interestingly, the auditors, who were advising either a buyer or a seller, were also strongly biased toward the interests of their clients.

"Rather than making a conscious decision to favor their clients, the auditors incorporated information about the company in a biased way — with the sellers' auditors providing estimates that were 30 percent higher, on average, than the estimates of auditors who served buyers. The study was replicated, with actual auditors from one of the ‘Big Four' accounting firms, and with similar results."

The authors take issue with the solution most commonly advanced to address this lack of objectivity: transparency. Citing a 2005 study, they maintain that mere disclosure of conflicts of interest is not enough to prevent unethical behavior and can actually exacerbate conflicts "by causing people to feel absolved of their duty to be objective. Moreover, such disclosure causes its ‘victims' to be even more trusting, to their detriment."

Typically, they argue, we hold people legally accountable in these contexts for intentional misconduct or perhaps gross negligence. The authors believe that we should also consider reforms that address unintentional influences on unethical behavior:

"Our confidence in our own integrity is frequently overrated. Good people unknowingly contribute to unethical actions, so reforms need to address the often hidden influences on our behavior. Auditors should only audit; they should not be allowed to sell other services or profit from pleasing their customers. Similarly, if we want credit-rating agencies to be objective, they need to keep an appropriate distance from the issuers of the securities they assess. True reform needs to go beyond fines and disclosures; if we are to truly eliminate conflicts of interest we must understand the psychology behind them."

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