Ethical Decision Making: More Needed Than Good Intentions

The flourishing field of behavioral finance indicates that people often do not engage in optimal decision making when investing. The same cognitive biases and mental heuristics that cause suboptimal investing may also cause people to make unethical decisions. For that reason, good intentions are necessary, but they are not sufficient for finance professionals who desire to act ethically. Insights presented in this article can assist the well-intentioned to do the right thing in difficult circumstances. The aim of this article is to underline for finance professionals that, although good intentions are essential to ethical behavior, they are not sufficient. Even well-intentioned people can stumble into ethical minefields if they do not keep their ethical antennae up and guard against errors in judgment that are commonly made—errors that, indeed, people are often predisposed to make. The first part of the article describes many of the cognitive biases and decisional heuristics (mental shortcuts) that can create ethical traps. These concepts form the basis of behavioral finance and have been addressed in relation to their adverse impact on investment decisions. But many people do not fully realize how the same cognitive limitations may also lead to judgments that are unethical. The limitations I discuss are obedience to authority; conformity bias; “incrementalism”; “groupthink”; overoptimism and overconfidence; a self-serving bias we all share; the influence of framing and of sunk costs; the power of the more vivid, tangible, and contemporaneous; and loss aversion. The second major part of the article suggests attitudes and actions that can assist those acting in good faith to minimize, even if not eliminate, their unethical decisions. The first correction is to “debias” ourselves. This step may require playing devil”s advocate with our decisions. Cognitive biases are vigorous phenomena, however, and not easy to neutralize or eliminate. The forces behind the self-serving and optimism biases, for example, not only warp the decision-making process in a particular direction but also make it difficult for a person to debias his or her own decision making. The article describes the necessary elements of debiasing as recognition of bias and its magnitude and direction, motivation to correct it, and the ability to adjust one’s response. The second correction for the finance professional who truly wishes to act ethically is to be vigilant, to think about ethics in every situation. Third, one must watch out for rationalizations. Most white-collar criminals do not view themselves as corrupt, as bad people, or as criminals. Rather, they rationalize their actions as normal in the business world. Finally, ethical behavior may call for courage—the gumption to advocate for pursuing the moral course. The good news is that just as normal people commit most of the evil acts in the world, they also commit most of the heroic acts. Most people who behave heroically do not resemble the characters in action movies. Whether charging a machine gun nest on Iwo Jima or blowing the whistle on Enron, heroic acts are generally performed by ordinary people who exercise vigilance, determination, self-reflection, and a little courage.