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Chapter 7 Lecture
Business Ethics Ethics: The
study of what is right and what is wrong. Business ethics: The study of what is right and what is wrong in business.
Ethics Between Strangers Market transactions are largely transactions between strangers. When and why do we treat strangers fairly and ethically? When and why do we cheat strangers or acquaintances?
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Humans are Ultrasocial Within each group of vertebrate species, the logarithm of brain size is proportional to the logarithm of social group size. Based on this relationship, humans should live in groups of about 150 individuals.
The Role of Ethics in Human Evolution Humans have evolved one set of emotional, and multiple sets of cultural tools that have made high levels of cooperation in ever-larger social groups possible. These tools very likely helped some groups outcompete others, which is how they became prevalent.
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Our Moral Emotion Toolkit The reciprocal response urge The gratitude sentiment The vengeance sentiment The urge to be liked and respected by others (to preserve and enhance our social reputation)
The Reciprocal Response Urge The person who receives a favor from an acquaintance will want to repay that favor. The person who is taken advantage of by an acquaintance will try to divest themselves of that relationship. In short, we are programmed to play “titfor-tat,” and to expect others to do the same.
The Gratitude Sentiment The gratitude sentiment reinforces the tit-for-tat instinct. It makes returning the favor pleasurable. It is associated with a release of oxytocin into the bloodstream. Oxytocin is the “love hormone.”
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The Vengeance Sentiment An impulse to punish someone who you perceive has treated you or someone you care about unfairly The more unfair the treatment, or the bigger the cost to the victim of the unfair treatment, the stronger the response
The Urge to be Liked and Respected by Others
Everyone cares what others think about them. Even people who swear that they don’t care Mark Leary’s experiment And it’s a good thing!
The Ultimatum Game Shows that people play tit-for-tat, believe some sharing is expected, and are willing to incur costs to punish those who don’t share as expected. Player A decides how much of $20 to give to player B. Player B then decides whether to: 1. Accept the split, or 2. Vote no, in which case both get $0
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Ultimatum Game Lessons 1. We have an instinct to share unearned gains with whoever’s around. 2. We expect others to be mad at us if we don’t share unearned gains. 3. We also have an instinct to punish those who do not act in accordance with our notions of fairness.
Our Cultural Toolkit Humans have evolved one set of emotional, and multiple sets of cultural tools that have made high levels of cooperation in ever-larger social groups possible. Our cultural toolkit includes norms, values, classes on ethics, church sermons, church attendance, ceremonies, vows, and much, much more!
Ethical Values (and Emotions) Constrain Behavior Efficiently Ethical values are a mechanism that controls behavior in business and in other areas of life. Ethical restraint is more efficient with society’s resources than are cruder controls such as police (and) lawsuits…Ethical values channel individual energy into pursuits that are benign to others and beneficial to society.
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Reading the Ten Commandments …makes people more ethical! Excerpt of a TED talk by behavioral economist Dan Ariely: http://www.youtube.com/watch?v=nUds TizSxSI
Tools That Increase Ethical Behavior Any mention of the Ten Commandments Swearing on a bible Swearing on your school’s honor code
The Trust Game One person is the truster. They are given some money on each round of the game. The truster is then asked to decide how much, if any, money to pass to another experimental subject called the “trustee.” The trustee’s identity is not known and the truster can’t see them. They are in another room. Any money the truster gives to the trustee is tripled by the experimenter.
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The Trust Game Then, if the truster gave them some money in that round, the trustee can decide how much if any to return to the truster. Each person plays many rounds of the game, with different people each time, sometimes as the truster, and sometimes as the trustee. An assumption of rational self-interest predicts zero sent in both directions But real trusters send an average of $5.16…
The Trust Game ...out of a $10 initial endowment. And real trustees return an average of $4.66. This means that, on average, the truster ends up with $9.82 and the trustee ends up with $10.82 – almost a 50/50 split! And they have more than doubled their money!
A Variant of The Trust Game When the truster is told at the beginning of a round the trustee’s level of religiosity on a scale from 1 to 5, two things happened: 1. When the truster learned that the trustee was very religious (4 or 5), they transferred more money to the trustee. 2. And the religious trustees really did transfer more money back to the trusters than nonreligious trustees did!
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Halftime Summary Making moral decisions involves both emotion (quick gut-level assessments of the morality of a given action) and slower reasoning about ethical rules, norms, and principles. When we are reminded of religion or religious principles, or are asked to swear an oath, our cheating is suppressed, at least for a short time.
Halftime Summary We expect religious people to be, on average, more trustworthy…and they are! In life, as in games, sometimes we can become better off if we are able to trust others and they prove themselves worthy of that trust. Unethical behavior by businesses and business managers impose high costs on victims. Cultures and countries that can expand trust and trustworthiness will do better.
Is This True? “Most business actions can be clearly judged ethical or unethical.” - Business, Government, and Society, 13th edition, Steiner and Steiner, page 197.
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Ethical Thinking is Guided by Maxims If it’s illegal, it’s definitely unethical. If I cooked for us, you should do the dishes. If you can’t use all the good things you have gotten by luck, you should share some of the excess with the less fortunate.
If It’s Illegal, It’s Definitely Unethical What Bernard Ebbers did was wrong (see pages 194-196) What Franklin D. Raines did was wrong (see pages 216-217) What Nick and Carolyn Ryberg did was wrong (see page 219) What Martha Stewart did was wrong (see pages 229-237)
If It’s Legal, Things Get Trickier Example: A123 Systems Needed Financing A123 Systems (stock symbol AONE) is an electric battery manufacturer. Early in their career, they landed two great accounts: Fisker Automotive and General Motors. But the batteries they shipped to Fisker had defects and it cost them $55 million. Also, EV sales have been lower than expected.
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A123 Systems Needed Financing 5/11/12: They got $50 million, payable in 26 bimonthly installments of either cash or stock, beginning July 1, 2012 But the number of shares of stock they would have to give would depend on the stock price on the installment dates. 7/6/12: They got another $10 million, payable in stock on July 12th and 30th. Again, the number of shares would depend on the stock price on those dates.
What The Investors Did They took all the stock they had gotten on July 1st, 12th, and 15th, and SOLD it as fast as possible on July 30th, driving the stock price down from $1.30 per share to $.49 per share! This means they will get about three times as many shares of stock as the current owners and investors thought they would! This means they will end up being half-owners of the company instead of 17% owners!
Was This Unethical? Two perspectives: If you think of the transaction between the current owners and the investors as being like a sale of medicine, then it was unethical. But if you think of this transaction as being like a boxing match, then what they did was not unethical.
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The Sport of Boxing In the sport of boxing, there are rules. But within the rules, you can hit your opponent has hard as you want and as hard as you can. If you kill them, it’s not your fault. And most people would say you did nothing wrong.
Is Business Like Boxing or Selling Medicine? Both seem like valid perspectives to me. And the human mind has a powerful ability to rationalize and justify our behavior when it is in our own best interests. Law is practiced like boxing. Investment bankers are known for being ruthless in business.
Inward-Directed vs. Outward-Directed Ethics I’m a huge fan of ethics when it is directed inward, toward our own behavior. I think using ethical codes to judge the behavior of others will be a never-ending battle.
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Summary Some combination of a vigorous, ongoing discussion of what is ethical and what is not, together with a good set of laws, and mechanisms to enforce those laws, are our best defense against cheating and stealing. Pledging to an honor code, or being reminded of religion, just prior to having an opportunity to cheat seems to help.
Summary Internet-based reputation management system? Mandate hourly oxytocin nasal spray intake for corporate CEOs? Let’s not throw out the baby with the bathwater. We don’t need cheating to be zero. Less cheating is definitely better.
This concludes the chapter 7 lecture.
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