Heuristics and Biases

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           Ethical Decision Making:
            Heuristics and Biases
                        William J. Wilhelm
                       College of Business
                     Indiana State University
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
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
     The Golden Rule, laws, corporate codes of
     ethics, etc.
   Universal duty towards others
    Kant’s categorical imperative

   Greatest good for the greatest number
    Bentham & Mill’s utilitarianism

   Characteristics of a good person
     Aristotle’s virtue theory: bravery, honesty,
     temperance, generosity, justice, pride.
       Steps in making a judgment
                 •Conventional rules and laws
1. Problem recognition imperative
2. Identification of alternative courses
                 •Virtue theory                 of
3.   Evaluation of alternative courses of action
4.   Estimation of outcome probabilities
5.   Calculation of expected values
6.   Justification of course of action chosen
Steps in making a judgment

1.   Problem recognition
2.   Identification of alternative courses of
3.   Evaluation of alternative courses of action
4.   Estimation of outcome probabilities
5.   Calculation of expected values
6.   Justification of course of action chosen
               Rational Actors?
       Optimal Decision-Making Model?
   People are plagued more by bad decision
    making than ethical breaches in reasoning.
   Cognitive and behavioral susceptibilities might
    lead (often unwittingly) to unethical decision
   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
Conflicting values
   Individual
   Social
   Religious
   Organizational
   Cultural
   Other
      Biases and heuristics that can
      cloud ethical decision making

     Obedience to authority             Process
     Social proof                       Cognitive dissonance
     False consensus effect             Sunk costs
     Over optimism                      The tangible and the
     Overconfidence                      abstract

     Self-serving bias                  Time-delay traps

     Framing                            Loss aversion

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"
   Stanley Milgram (1963) experiments.
   Students need to be aware of this
    potentially corrosive influence from both
    formal lines of authority and non-formal
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
   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
   Humans are often overly optimistic about
   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.
   People are often irrationally overconfident
   Deals with perceptions about INDIVIDUAL
   People tend to rate themselves as well
    above average in most traits, including
   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
   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)
   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

   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
    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
   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.

   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
   Inoculate employees against weaknesses in
    their own decision-making processes.
   Largely ignored in business school and law
    school classrooms in subjects of professional

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