Topic 1: Introduction to ethics, including individual …...2019/07/24 · Topic 1: Introduction to ethics, including individual cognitive bias and sources of judgment and decision

Topic 1: Introduction to ethics, including individual cognitive bias and sources of judgment and decision bias

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Topic 1: Introduction to ethics, including individual cognitive bias and sources of judgment and decision bias

Ethics and Professionalism in Financial Advice | FPC002B_T1_v2 © Kaplan Higher Education

Ethics and Professionalism in Financial Advice

Contents

Overview ...................................................................................................................................... 1.1

Topic learning outcomes ......................................................................................................................... 1.1

1 The ethics of decision making ............................................................................................ 1.2

1.1 What is ‘ethics’? .......................................................................................................................... 1.2

1.2 Hypotheticals .............................................................................................................................. 1.2

2 Ethical theories ................................................................................................................. 1.4

2.1 Virtue ethics ................................................................................................................................ 1.4

2.2 Deontological theory................................................................................................................... 1.4

2.3 Teleological theory ...................................................................................................................... 1.5

3 Barriers to ethical decision making .................................................................................... 1.7

3.1 Partisanship ................................................................................................................................. 1.7

3.2 Rationalisation ............................................................................................................................ 1.9

3.3 Implicit bias/unconscious bias .................................................................................................. 1.11

3.4 Ethical blindness........................................................................................................................ 1.13

3.5 Ethical fading ............................................................................................................................. 1.14

3.6 Ethical scripts ............................................................................................................................ 1.15

4 Ethical frameworks........................................................................................................... 1.16

4.1 The consequentialist framework .............................................................................................. 1.16

4.2 The duty framework.................................................................................................................. 1.16

4.3 The virtue framework ............................................................................................................... 1.17

Summary ..................................................................................................................................... 1.18

References .................................................................................................................................. 1.19

1.1


‘Nothing is more difficult, and therefore more precious, than to be able to decide.’ (Napoleon Bonaparte, Maxims, 1804)

Overview The first two topics in this subject provide students with foundation knowledge in ethics and professionalism respectively, essential to understanding and examining their obligations as financial advisers under the newly created Financial Adviser Standards and Ethics Authority Ltd (FASEA) Code of Ethics (which are addressed in Topic 3).

For centuries, scholars, philosophers and professionals have struggled with the concept of ethics. In attempting to reach a simple definition, general agreement now seems to have been reached that ‘ethics’ falls within the philosophical study of morality. For the purposes of this topic, we will look at two approaches to understanding ethics: goodness (what ends we ought to pursue) and right action (the principles of right and wrong).

This topic introduces the concept of ‘ethics’ and its application to financial advisers. We will explore several schools of thought on how best to conceptualise and understand ‘ethics’, as well as the many barriers that may exist in preventing people from making ethical decisions. We will do so in the context of the role of a financial adviser.

We will also look at how financial advisers can apply ethical concepts to their decision making by unpacking the tension between the rules that apply to them and their own personal values. This tension can be described as the interface between role morality (the rules, legislation and employment requirements that impact on advisers) and ordinary morality (the values, beliefs and norms held by the adviser as a member of the general community).

In order to explore such conduct, it is first necessary to understand the differing schools of thought about how one should view the impact or outcome of ethical decision making.

This topic specifically addresses the following subject learning outcomes:

1. Explain the role of ethical frameworks and professional standards within the financial planning profession.

2. Assess the impacts of cognitive, judgment and decision biases on financial advisers and their clients.

Topic learning outcomes On completing this topic, students should be able to: • explain the concept of ethics and the role of ethical frameworks within the financial planning

profession • analyse barriers to ethical decision making • gauge the implications of certain types of biases upon financial advisers and their clients.

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1 The ethics of decision making

1.1 What is ‘ethics’? It is difficult to ascribe a single definition to the word ‘ethics’ because ethics means many different things to different people. At its most basic, ‘ethics’ is, according to the Oxford Dictionary ‘moral principles that govern a person’s behaviour or the conducting of an activity’ or ’the moral correctness of specified conduct’. Ethics is, therefore, about deciding between good and bad, or right and wrong.

Ethics falls within the school of moral philosophy. According to Thomas Hobbes, ‘moral philosophy is nothing else but the science of what is good and evil in the conversation and society of mankind’. (Hobbes 1909–14 [par. 40]).

We all like to think of ourselves as good, ethical people. Research reveals that unethical decisions are more likely to occur when: • the person making the decision fails to see the decision as involving any ethical issues, or • when a person making a decision believes that any ethical issues that can be identified can be

overcome.

This is because people generally believe that they view the world objectively and we ‘see ourselves as more fair, unbiased, competent, and deserving than average; and to be overconfident about our abilities and prospects’ (Robbenholt & Sternlight 2013, p. 1116).

1.2 Hypotheticals Throughout this subject, you will be encouraged and challenged to assess your awareness and develop your understanding of ethical decision making by examining hypothetical scenarios and case studies. These can be considered individually or are also suitable for generating discussion with peer students or colleagues.

Hypotheticals presented throughout this subject cannot be seen as legal advice or a legal interpretation of compliance with the Financial Planners and Advisers Code of Ethics (FASEA Code of Ethics). They are designed to challenge you to pose your own thoughts about what one ought to do under certain circumstances. For this reason, you might even disagree with the thoughts here or the opinions of others, which can form a great basis for an ethical discussion.

It is important to remember that the FASEA Code of Ethics comes into effect from 1 January 2020 and that further guidance and clarification on the Code will be provided by the regulator. Both the Financial Planning Association of Australia (FPA) and Association of Financial Advisers (AFA) have sought further clarification on the interpretation and application of several of the Standards (particularly regarding Standards 2, 3, 5 and 6). Financial advisers must determine how they will meet the ethical standards, and begin now to assess how their conduct, business practices, systems and processes align with the requirements of the Code.

The hypotheticals in the topics are not assessable. However, in your assessments you may be presented with case studies or scenarios in the form of hypotheticals. Consequently, reviewing these hypotheticals and taking part in online forum discussions in KapLearn will provide you with valuable opportunities to apply and test your ethical understanding and thinking.

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We acknowledge that a scenario presented in a course cannot substitute for the ethical decisions you make every day, and for the fact that those decisions will be exercised under the authority of your licensee and in the context of their systems and advice expectations, which cannot be anticipated in presenting this subject.

When interacting with your client, it will be your own ethical response to the Code that will be questioned and you should apply your best ethical consideration at that time. These hypotheticals and the course materials and assessments are designed to expand the approach you might take to understand and apply your ethical duty as described in the Code, but they are not a substitute for your ‘real-life’ practice.

To get you started, please review the first hypothetical below.

Hypothetical 1

A 58-year-old client wants access to funds from their superannuation to pay out debt to avoid potential bankruptcy and to purchase a house.

The client is renting and, as a result of a divorce, has no assets and is in a difficult place in their life.

The client informs the adviser that they intend to retire from work, withdraw preserved funds from superannuation and then go back to work a month later with the same company. This arrangement has been cleared by the client’s employer.

The adviser is aware of the client’s plans and assists the client to make the withdrawals under an execution-only arrangement. The adviser then provides advice to the client on what to do with the proceeds from the superannuation withdrawal.

Although the adviser has helped the client achieve their goals, the adviser may have assisted the client to breach legislation. The adviser and licensee may also potentially benefit from this situation by creating an advice need for the client in relation to funds that were otherwise not accessible to the client.

1.4


2 Ethical theories

2.1 Virtue ethics The difficulty we face in making ethical decisions tends not to be at the extremes of good and bad or right and wrong, but where our options are in the grey area — where the choice of action may be just a little more correct or a little more wrong. The great Greek philosopher, Aristotle (384–322 BC), believed that one became a good person by making good choices. He developed a philosophy he called ‘phronesis’, or practical wisdom. Aristotle believed that the ability to choose wisely should emerge from genuine personal reflection about virtues.

Aristotle’s concept of virtue suggests that one should focus on the virtuous character of the individual. In doing so, one should ask ‘what kind of person should I be in order to be a good person?’ This question is different to the question ‘what is a good action?’ Virtue ethics is therefore person-based rather than action-based.

Virtue ethics looks at the virtue or moral character of the person carrying out an action, rather than at ethical duties and rules, or the consequences of particular actions. Virtue ethics not only deals with the rightness or wrongness of individual actions, it provides guidance as to the sort of characteristics and behaviours a good person will seek to achieve. In that way, virtue ethics is concerned with the whole of a person’s life rather than particular episodes or actions.

Virtue theorists posit that there is a common set of virtues all human beings would benefit from, rather than different sets for different sorts of people, and that these virtues are natural to mature human beings — even if they are hard to acquire. These virtues are traditionally said to include the following: • prudence • justice • fortitude • temperance.

2.2 Deontological theory While virtue ethicists such as Aristotle focused on self-reflection, other ethicists have focused on actions. German philosopher Immanuel Kant (1724–1804) believed that certain types of actions (including murder, theft and lying) were absolutely prohibited, even in cases where the action would bring about more happiness than the alternative. In other words, we are morally obligated to act in accordance with a certain set of principles and rules regardless of the outcome of so acting. This school of thought is formally known as a ‘deontological’ or ‘rule-based theory’.

The word ‘deontological’ comes from the Greek word deon, which means ‘duty’. Deontological theories hold that some acts are always wrong, even if the act leads to an admirable outcome. Actions in deontology are therefore always judged independently of their outcome. An act can be morally bad but may unintentionally lead to a favourable outcome.

Kant’s deontological theory derives from human reason. Kant’s theory is based on his view of the human being as having the unique capacity for rationality. According to Kant, the moral worth of an action is determined by the human will, which is the only thing in the world that can be considered good without qualification. Kant believed that moral principles should be seen as laws that issue from mankind’s reason. According to Kant, these moral principles should be based in laws, codes and rules and that the moral principles should be absolute and focused on fairness.

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Kant’s moral principles consist of a set of maxims which he called ‘categorical imperatives’. There are three formulations of the ‘categorical imperative’. They are as follows:

Act only according to that maxim whereby you can at the same time will that it should become a universal law. without contradiction.

Act in such a way that you treat humanity, whether in your own person or in the person of any other, never merely as a means to an end but always at the same time as an end.

Therefore, every rational being must so act as if he were through his maxim always a legislating member in the universal kingdom of ends.

(Kant 1785 as cited in Shakil 2013)

The first maxim (universality) posits that moral rules should be universal. Kant says that we should always act in such a way that we would be willing for it to become general law that everyone else should do the same in the same situation. So, if you are not willing for an ethical rule you claim to be following to be applied equally to everyone, then that rule is not a valid moral rule. The first maxim is similar to the golden rule: ‘Do not impose on others what you do not wish for yourself’.

The second maxim (human dignity) posits that moral rules must respect human beings. According to Kant, people should always be treated as valuable — as an end in themselves — and should not just be used in order to achieve something else. They should not be tricked, manipulated or bullied into doing things.

The third maxim (consistency) posits that we ought to act only by maxims that harmonise with a possible kingdom of ends. In other words, we have a perfect duty not to act by maxims that create incoherent or impossible states of natural affairs when we attempt to universalise them, and we have a duty not to act by maxims that lead to unstable or greatly undesirable states of affairs for all parties involved.

Kant’s ethics is not the only example of deontology; any system involving a clear set of rules is a form of deontology, which is why some people call it a ‘rule-based theory’. The Ten Commandments is an example, as is the Universal Declaration of Human Rights.

2.3 Teleological theory Another school of thought, or theory about ethics, is utilitarianism, whose best-known proponents are John Stuart Mill (1806–1873) and Jeremy Bentham (1748–1832). Utilitarianism is ‘the moral theory that an action is morally right if and only if it produces at least as much good (utility) for all people affected by the action as any alternative action the person could do instead’ (Audi 1999). In this theory, in contrast to the deontological theory discussed above, answers to questions about the ends we ought to pursue determine the principles of right and wrong. In other words, the ends justify the means. This theory is known as a teleological theory. In teleological theories, (moral) right is derived from a theory of the (non-moral) good, or what is good or desirable as an end to be achieved. In Greek, ‘telos’ means ‘goal’ or ‘aim’. Moral behaviour is goal-directed or aim-directed.

Hedonism is a variation of the teleological theory which connects the consequences of human behaviour to the moral concepts of ‘good and bad’, ‘right and wrong’ and ‘moral and immoral’. The hallmark of most teleological moral theories is that they identify these moral concepts with pleasure and pain, or happiness and unhappiness. Hence, moral acts are considered good, right or moral insofar as they lead to pleasurable consequences, and bad, wrong, or immoral if they lead to painful consequences.

1.6


Utilitarianism and hedonism are examples of ‘consequentialism’. Consequentialism is an ethical theory that judges whether something is right by what its consequences are. For instance, most people would agree that lying is wrong. But if telling a lie would help save a person’s life, consequentialism says it is the right thing to do.

There are of course difficulties with either theory outlined above. For example, how do set rules deal with ambiguity? If the ends justify the means for the greater good, what about an individual client’s need to maximise profit, for example by investing in something which produces great harm to the community?

Each of the above schools of thought, as also described in Figure 1 below, offer a number of interesting ideologies for financial advisers to consider when dealing with clients ethically, and in particular the unique relationship between the financial adviser and the client. These ideologies can assist in making ethical decisions. The next section of this topic will address some of the obstacles to ethical decision making that can arise.

Figure 1 Ethics schools of thought

Kaplan Financial Limited, 2012.

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3 Barriers to ethical decision making

3.1 Partisanship It is correct to state that financial advisers can and do play a significant role in their clients’ lives. It would also be correct to state that the role financial advisers play is akin to that of a doctor. While a doctor looks after a client’s general health, a financial adviser looks after a client’s financial health.

The relationship between a financial adviser and a client, similar to a doctor and a patient or even a lawyer and a client, can be described as being a relationship of ‘partisanship’. The word ‘partisan’ in social psychology is used to describe those who are adherent to, or are aligned with, a specific ‘party, faction, closet, or a person’ (Perlman 2015, p. 1643). The term is most often used in politics but it can equally be used in describing professional or occupational relationships. Doctors, for example, become adherent to and aligned with their patients and seek to diagnose and treat their patients in their patient’s best interests. The partisan relationship of the doctor and patient is most clearly articulated in the classic version of the Hippocratic Oath, which states as follows:

I swear by Apollo Physician and Asclepius and Hygieia and Panaceia and all the gods and goddesses, making them my witnesses, that I will fulfil according to my ability and judgment this oath and this covenant:

To hold him who has taught me this art as equal to my parents and to live my life in partnership with him, and if he is in need of money to give him a share of mine, and to regard his offspring as equal to my brothers in male lineage and to teach them this art — if they desire to learn it — without fee and covenant; to give a share of precepts and oral instruction and all the other learning to my sons and to the sons of him who has instructed me and to pupils who have signed the covenant and have taken an oath according to the medical law, but no one else.

I will apply dietetic measures for the benefit of the sick according to my ability and judgment; I will keep them from harm and injustice.

I will neither give a deadly drug to anybody who asked for it, nor will I make a suggestion to this effect. Similarly I will not give to a woman an abortive remedy. In purity and holiness I will guard my life and my art.

I will not use the knife, not even on sufferers from stone, but will withdraw in favor of such men as are engaged in this work.

Whatever houses I may visit, I will come for the benefit of the sick, remaining free of all intentional injustice, of all mischief and in particular of sexual relations with both female and male persons, be they free or slaves.

What I may see or hear in the course of the treatment or even outside of the treatment in regard to the life of men, which on no account one must spread abroad, I will keep to myself, holding such things shameful to be spoken about.

If I fulfil this oath and do not violate it, may it be granted to me to enjoy life and art, being honored with fame among all men for all time to come; if I transgress it and swear falsely, may the opposite of all this be my lot.

I swear to fulfill, to the best of my ability and judgment, this covenant:

I will respect the hard-won scientific gains of those physicians in whose steps I walk, and gladly share such knowledge as is mine with those who are to follow.

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I will apply, for the benefit of the sick, all measures which are required, avoiding those twin traps of overtreatment and therapeutic nihilism.

I will remember that there is art to medicine as well as science, and that warmth, sympathy, and understanding may outweigh the surgeon’s knife or the chemist’s drug.

I will not be ashamed to say “I know not”, nor will I fail to call in my colleagues when the skills of another are needed for a patient’s recovery.

I will respect the privacy of my patients, for their problems are not disclosed to me that the world may know. Most especially must I tread with care in matters of life and death. If it is given me to save a life, all thanks. But it may also be within my power to take a life; this awesome responsibility must be faced with great humbleness and awareness of my own frailty. Above all, I must not play at God.

I will remember that I do not treat a fever chart, a cancerous growth, but a sick human being, whose illness may affect the person’s family and economic stability. My responsibility includes these related problems, if I am to care adequately for the sick.

I will prevent disease whenever I can, for prevention is preferable to cure.

I will remember that I remain a member of society, with special obligations to all my fellow human beings, those sound of mind and body as well as the infirm.

If I do not violate this oath, may I enjoy life and art, respected while I live and remembered with affection thereafter. May I always act so as to preserve the finest traditions of my calling and may I long experience the joy of healing those who seek my help.

Similarly, a partisan relationship is also said to arise in the lawyer–client relationship. It is characterised in that relationship through the concept of acting in the client’s ‘best interests’. In this relationship, the lawyer is obligated by conduct rules to act in the best interests of their client. So, when a client instructs a lawyer to do something that the lawyer believes is not in the client’s best interests, the lawyer is obliged to inform the client that the instructions being provided are not in the client’s best interests and the lawyer will not so act.

The relationship between a financial adviser and a client is no different. Financial advisers also have a duty to act in the best interests of their client. The duty to act in a client’s best interests is set out in section 961 of the Corporations Act 2001 (Cth). The duty requires advisers to act in the best interests of their retail clients and to place their clients’ interests ahead of their own when developing and providing personal advice. The duty exists irrespective of whether the adviser is paid for the advice provided to the client. Failure to satisfy these rules may lead to significant civil and administrative penalties such as fines, enforceable undertakings or banning from the profession.

While the relationship of partisanship may appear simple and the concept of best interests uncontroversial, difficulties can arise where the adviser becomes too involved with their client and has a view that is either unrealistic or possibly not in their client’s best interests. This often occurs where an adviser loses objectivity.

Interestingly, the danger of losing objectivity increases in organisational settings. For example, in a recent study, when auditors at major accounting firms were given hypothetical accounting scenarios and asked to assess the accounting in each situation, they experienced a loss of objectivity.

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In this study, half of the accountants were asked to assume that they were retained by the firm they were auditing, while the remainder were told to assume they had been hired by an outside investor who was considering making an investment in the company. In each scenario, the auditors were, on average, more likely to find that the company’s financial reports complied with generally accepted accounting principles (GAAP) when they played the role of the company’s accountant than when they were assigned as the investor’s accountant. The authors of the study reached the following conclusion:

Participants were placed in partisan roles that gave them a reason to desire a certain outcome. When asked then to make neutral judgements, they failed to extricate themselves from the influence of their partisan roles. It was as if, once they had arrived at a partisan perspective, the justifications for that perspective were readily accessible in their minds and so held undue sway over subsequent judgements, even when they were made in the presence of an explicit goal of impartiality.

(Moore, Tanlu & Bazerman, 2010, p. 46)

In this study, we can see that the relationship between the accountant and the client, when influenced by partisanship, resulted in the accountant adopting the position of the client, thereby losing objectivity. This is just one obstacle to ethical decision making. There are many more.

3.2 Rationalisation In addition to the influence of partisanship, the relationship between financial adviser and client can be influenced by rationalisation and bias. Rationalisation or bias may result in a financial adviser acting in a manner that is contrary to the client’s best interests and perhaps making unethical decisions.

Similar to the term ‘ethics’ the term ‘rationalisation’ has a variety of meanings. The Oxford Dictionary defines ‘rationalisation’ as, inter alia, ‘the action of attempting to explain or justify behaviour or an attitude with logical reasons, even if these are not appropriate’. In other words, rationalisation is an invented explanation that hides or denies true motivations, causes or actions. They are the excuses people give themselves for not living up to their own ethical standards.

Rationalisations can occur often, and often subconsciously. They are the tools we use to explain or excuse our behaviour. When confronted by an accusation about our poor behaviour, our response might be ‘I didn’t think it was wrong’, ‘everybody else does it’, ‘I was just following orders’, ‘this is the way it is done around here’ or ‘no one got hurt’. These rationalisations allow us to ignore or mask unethical behaviour. Rationalisations are one of the major facilitators of unethical behaviour because they allow us to act unethically, but still tell ourselves that what we are doing is okay.

Rationalisations are essentially: • self-serving explanations • assist in making behaviour appear more acceptable to both self and others • involve a degree of self-deception • often occur outside the realm of the conscious mind • can reduce feelings of responsibility and/or anxiety for the negative aspects of behaviour • can neutralise the impact of legal or ethical issues involved in a decision.

Rationalisations are therefore a manifestation of self-interest. They show how easily we defer to self-interest as a means to avoid censure and show ourselves in the best possible light.

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According to Anand, Ashforth and Joshi (2004, pp. 39–53), there are six categories of rationalisation that are commonly used in business. They are as follows: 1. denial of responsibility (‘I know I shouldn’t do this, but my boss is making me, so it’s not really

my fault.’) 2. denial of injury (‘I know that I shouldn’t do this, but who’s really being hurt?’) 3. denial of victim (‘I know that I shouldn’t do this, but this guy is so stupid that he deserves to get

ripped off.’) 4. social weighing (‘I know that I shouldn’t do this, but my competitors are doing even worse stuff.’) 5. appeal to higher loyalty (‘I know that I shouldn’t do this, but I have a family to feed.’) 6. metaphor of the ledger (‘I know that I shouldn’t do this, but I give a lot of money to charity.’)

The Josephson Institute of Ethics (n.d) lists the following common rationalisations:

If it’s necessary, it’s ethical: This approach often leads to ends-justify-the-means reasoning and treating non-ethical tasks or goals as moral imperatives.

The false necessity trap: Necessity is an interpretation and not a fact. We tend to fall into the “false necessity trap” because we overestimate the cost of doing the right thing and underestimate the cost of failing to do so.

If it’s legal and permissible, it’s proper: This substitutes legal requirements for personal moral judgement. This alternative does not embrace the full range of ethical obligations, especially for those involved in upholding the public trust. Ethical people often choose to do less than what is maximally allowable but more than what is minimally acceptable.

It’s just part of the job: Conscientious people who want to do their jobs well often compartmentalize ethics into two categories: private and job-related. Fundamentally decent people may often feel justified doing things at work that they know to be wrong in other contexts.

It’s for a good cause: This is a seductive rationale that loosens interpretations of deception, concealment, conflicts of interest, favouritism, and violations of established rules and procedures.

I was just doing it for you: This rationalization pits values of honesty and respect against the value of caring and overestimates other people’s desire to be “protected” from the truth. This is the primary justification for committing “little white lies”.

I’m just fighting fire with fire: This is the false assumption that promise-breaking, lying, and other kinds of misconduct are justified if they are routinely engaged in by those with whom you are dealing. This rationale compromises your own integrity.

It doesn’t hurt anyone: This rationalization is used to excuse misconduct when violating ethical principles so long as no clear and immediate harm is perceived. It treats ethical obligations as simply factors to be considered in decision-making rather than as ground rules.

Everyone’s doing it: This is a false “safety in numbers” rationale that often confuses cultural, organizational, or occupational behaviours and customs as ethical norms.

It’s OK if I don’t gain personally: This justifies improper conduct for others or for institutional purposes.

I’ve got it coming: People who feel overworked and/or underpaid rationalize that minor “perks” (acceptance of favours, discounts, gratuities, abuse of sick leave, overtime, personal use of office supplies) are nothing more than fair compensation for services rendered.

I can still be objective: This rationalization ignores the fact that a loss of objectivity always prevents perception of the loss of objectivity. It also underestimates the subtle ways in which gratitude, friendship, anticipation of future favours and the like affect judgement.

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Being acutely aware that rationalisations can be a barrier to ethical decision making, and of the type of rationalisations that can exist is a positive step towards ensuring that decisions about the best interests of a client are not ethically thwarted.

3.3 Implicit bias/unconscious bias Implicit bias or unconscious bias is another barrier to ethical decision making. Unconscious bias is a mental process or shortcut, consisting of attitudes or stereotypes developed over time which impact on our behaviour and decision making outside of the conscious mind. Unconscious bias exists when people unconsciously hold attitudes towards others or associate stereotypes with them. People’s unconscious bias may run counter to their conscious beliefs without realising it and may affect both financial advisers and their clients.

Research conducted by Australian Industry Group shows that we all hold unconscious biases. Unconscious biases can impact on how we see other groups, races or culture, how we perceive ourselves morally superior to others, and most importantly for this topic, the impact unconscious bias has on our decision making in the workplace.

The psychological study of unconscious biases has identified numerous types of bias. There are several types that have a particular impact on the workplace. They are as follows: • Affinity bias: our bias towards ‘someone like me’, for example, in looks, gender,

behavior or background. • Halo effect: can occur when we see one great thing about a person and therefore think

everything good about them. • Horns effect: the opposite of the Halo effect when we see one bad thing about a person and

it affects our opinions of their other attributes. • Perception bias: where we act on stereotypical beliefs of groups of people, e.g. race, gender,

socio-economic background, and apply that belief to individuals of that group. • Conformity bias: the desire to act like others caused by peer group pressure. • Confirmation bias: the tendency to seek information that confirms pre-existing beliefs or

assumptions. • Group think: the tendency to try and ‘fit in’ to a group by agreeing with their thoughts or

positions, and not expressing our own caused by under-confidence and a desire to ‘belong’.

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Other types of bias that can lead to unconscious bias include: • Self-confidence bias: the tendency to be overconfident about our knowledge or power to control

a situation and be unrealistically optimistic about outcomes • Under-confidence: the tendency to not believe in ourselves, other people or institutions;

our ethical judgments may be distorted by a sense of futility • Cognitive distortions: the tendency to distort or replace our ethical judgment with other types of

thinking such as political ideologies or a misplaced or inflated sense of loyalty to our employer or client

• Status/power: status and power tend to make us feel more entitled and overconfident about our capabilities. For example, financial advisers may hold or have access to specialist information that the client may not. This can create a status differential between the adviser and the client which can result in overconfident and potentially unethical decisions.

• Agency relationship: in an agency relationship between the adviser and client, the agent (adviser) is a person who acts on behalf of another person, the principal (client). In this relationship the agent must set aside their own interests in favour of the principal. We may be more willing to make unethical decisions through and on behalf of others. This occurs when we have an inflated sense of righteousness of our clients’ positions, over identify with our clients’ interests, want to win at any cost for our clients and fail to make an independent ethical judgment. Clients may also be more willing to engage in unethical conduct through their adviser, which they would not engage in on their own.

• Self-serving bias: the tendency to see things in ways that support our best interests and pre-existing points of view. This might cause us to unconsciously frame and decide an issue to accommodate our own goals/interests. For example, financial advisers may find themselves in a conflict between the interests of the client and the benefits they may receive from offering the client certain products. The adviser must ask, ‘Does my advice surely serve the needs of my client or do I shade my advice depending on the structure of a fee schedule?’

Table 1 Examples of bias in the provision of advice

Category Illustration

Perception bias: the tendency to form stereotypes and assumptions about certain groups that make it impossible to make an objective judgment about members of those groups

John has been an adviser for over 30 years and has a strong track record of achieving stellar returns on his clients’ investments. Jack is a prospective client who meets with John to discuss investing a small inheritance. Jack is in his mid-50s and has worked as an electrician his whole career. Jack informs John that he is seeking an investment return of 12%. John’s recommended investment strategy is to focus on emerging market funds and traditional bank shares. When briefed by John, Jack is surprised that he is not presented with a range of options, including an alternative that is focused on ethical investments.

Self-confidence bias: the tendency to be overconfident about our knowledge or power to control a situation and be unrealistically optimistic about outcomes

Ross is seeking financial advice. He is 35, married, has two young children and a mortgage. He has concerns about savings, wealth accumulation and retirement planning. During the discussion Abdul, his financial adviser, recommends that Ross review his insurance arrangements. Ross declines this offer as he describes himself as ‘fit, in great health and ready to work for the next 30 years’. He is confident that he will not need to consider income protection and trauma insurance for at least another 10 years.

Agency relationship: in this relationship the agent must set aside their own interests in favour of the principal

Janet has been Samantha’s financial adviser for over five years and is aware of the financial difficulties that Samantha has faced since they commenced their advice relationship. Samantha contacts Janet and is clearly distressed. She explains to Janet that she is in urgent need of $10,000 to cover a special levy on her residential property. In her haste, she offers to sell her car to Janet for the same amount. Janet does some research and discovers that the car would sell for around $12,000 in the market but agrees to the purchase for $10,000 anyway. She believes that this is appropriate as Samantha will not have to pay to advertise the car and that there would be no other way for Samantha to complete the sale within the required timeframe.

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3.4 Ethical blindness Many models of (un)ethical decision making assume that people decide rationally and are, in principle, able to evaluate their decisions from a moral point of view. However, people might behave unethically without being aware of it.

The term ‘ethical blindness’ is defined as the failure of a decision maker to ‘see’ the moral components of their behaviour, not because they are morally uneducated or lack good intentions, but because rationalisation processes remove the ethics from view. In other words, ethical blindness is ‘the decision-maker’s temporary inability to see the ethical dimension of a decision at stake’ (Palazzo, Krings & Hoffrage 2012).

Ethical blindness can affect anyone at any time. History is littered with thousands of examples of organisations and their leaders engaging in behaviour that seems to lack moral common sense. An example of an organisation engaging in ethical blindness is Volkswagen. In September 2015, the well-respected multinational vehicle manufacturer was charged with intentionally manipulating emissions software installed in its diesel vehicles (Ferrell et al. 2017). In lab testing, the cars met US emission standards. On the road, where the defeat device automatically turned off, testing in some cases showed emissions 35 times higher than allowed. The software recognised when a car was being tested for emissions in a lab because only two of its four wheels were used, at which point it activated emissions-controlling devices that would have inhibited performance in on-road conditions.

In 2014, the defeat devices were discovered. The impact of the discovery was astounding. Regulators across the world opened investigations, and Volkswagen halted sales of its 2015 models. The CEO of Volkswagen resigned, senior managers were suspended or put on leave, and Volkswagen stock plunged in value (Topham et al. 2015).

According to Bazerman and Tenbrunsel (2011), there are five key blind spots that lead to unethical behaviour. They include: • Ill-conceived goals: The act of setting goals and incentives to promote a desired behaviour,

but they encourage negative behaviour instead. • Motivated blindness: The act of overlooking the unethical behaviour of others when it is in

one’s interest to remain ignorant. • Indirect blindness: The act of holding others accountable for unethical behaviour when it is

carried out by third parties. • The slippery slope: The act of seeing unethical behaviour occur gradually rather than seeing

it happen actually. • Overvaluing outcomes: The act of excusing unethical behaviour if the outcome is good.

These blind spots described by Bazerman and Tenbrunsel are set out and further explained in Table 2.

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Table 2 Ethical blind spots

Ill-conceived goals Motivated blindness Indirect blindness The slippery slope Overvaluing outcomes De

scrip

tion We set goals and

incentives to promote a desired behaviour, but they encourage a negative one.

We overlook the unethical behaviour of others when it’s in our interest to remain ignorant.

We hold others less accountable for unethical behaviour when it’s carried out through third parties.

We are less able to see others’ unethical behaviour when it develops gradually.

We give a pass to unethical behaviour if the outcome is good.

Exam

ple

The pressure to maximise billable hours in accounting, consulting, and law firms leads to unconscious ‘padding’.

Baseball officials failed to notice they had created conditions that encouraged steroid use.

A drug company deflects attention from a price increase by selling rights to another company, which imposes the increase.

Auditors may be more likely to accept a client’s questionable financial statements if infractions have accrued over time.

A researcher whose fraudulent clinical trial saves lives in considered more ethical than one whose fraudulent trial leads to death.

Rem

edie

s

Brainstorm unintended consequences when devising goals and incentives. Consider alternative goals that may be important to reward.

Root out conflicts of interest. Simply being aware of them doesn’t necessarily reduce their negative effect on decision-making.

When handing off or outsourcing work, ask whether the assignment might invite unethical behaviour and take ownership of the implications.

Be alert for even trivial ethical infractions and address them immediately. Investigate whether a change in behaviour has occurred.

Examine both ‘good’ and ‘bad’ decisions for their ethical implications. Reward solid decision processes, not just good outcomes.

Source: Bazerman and Tenbrunsel 2011.

3.5 Ethical fading Ethical fading, similar to ethical blindness, is another barrier to ethical decision making.

Ethical fading refers to the process by which the ethical aspects of a decision tend to disappear from one’s perception. This can occur where one focuses on different aspects of an issue such as achieving a successful outcome for a client or perhaps increasing profit generation for the employer. In such situations, the potentially unethical issues associated with ‘winning at all costs’, overcharging or over-servicing can arise. The concept of ethical fading was first coined by Ann Tenbrunsel and David Messick. Tenbrunsel and Messick (2004) used the term ‘ethical fading’ to explain unethical behaviour in organisational culture. As they wrote:

We introduce the term ‘ethical fading’ to define the process by which the moral colors of an ethical decision fade into bleached hues that are void of moral implications. If we are correct, educating individuals on moral principles is only useful when individuals perceive that the decision has ethical coloration, but useless when ethical fading has occurred or may occur.

A by-product of ethical fading is moral disengagement. When one morally disengages in the decision-making process, the ethical aspects of a decision disappear and moral understanding diminishes. The effect of this phenomenon on conduct is that people tend to become more and more comfortable with pushing boundaries and validating previous actions even where those actions were unethical (Moore & Loewenstein 2004).

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3.6 Ethical scripts An additional barrier to ethical decision making is the impact of ethical scripts on conduct. An ethical script is defined by Robbennolt and Sternlight (2013) as:

… knowledge structures that guide our understanding of how events typically unfold — that govern a particular situation and may determine whether or not ethical considerations are taken into account.

The term ‘script’ is borrowed from psychologists who use the term to refer to procedures that experience tells us to use in specific situations. For example, when we brush our teeth or congratulate a friend on the arrival of a new grandchild, we probably use scripts. These scripts are cognitive processes that we unconsciously use that structure our knowledge into a template to govern our behaviour and response to particular situations. They can help us deal with complex situations but they carry the risk that they may mask the ethics of a situation by urging us to follow a routine that has been followed in the past.

An example of unethical behaviour as a result of scripts is Ford Motor Company’s failure to recall the Pinto in the 1970s. The Pinto was an automobile with an undetected design flaw that made the gas tank burst into flames on impact, resulting in the death and disfigurement of scores of victims. Dennis Gioia, the Ford recall coordinator at the time, reviewed hundreds of accident reports to detect whether a design flaw was implicated but never found any flaws. Pinto ascribed his behaviour to having trained himself to respond to prototypical cues. In reflecting upon his own role in the Ford Pinto case, Gioia asked himself, ‘Why didn’t I see the gravity of the problem and its ethical overtones?’ (Gioia 1992).

Unlike other forms of experience, scripts are stored in memory in a mechanical or rote fashion. When we encounter a very familiar situation, rather than actively think about it, we reserve our mental energy for other purposes and behave as though we are cruising on automatic pilot. The impact of scripts on conduct can result in people engaging in unethical behaviour because they have been scripted to do so.

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4 Ethical frameworks There are three broad frameworks that have been developed to guide ethical decision making: • the consequentialist framework • the duty framework • the virtue framework.

4.1 The consequentialist framework The consequentialist framework posits that one should focus on the future effects of possible courses of action and consider the direct or indirect impact or effect of those courses of action on people. Under this framework, one would ask about desirable outcomes and then deduce what ethical conduct would be relevant in achieving those outcomes or the best consequences. This framework allows one to make a decision about whether to engage in a course of action and whether that course of action will produce the most good.

The consequentialist framework is a pragmatic framework. It is a framework that assists one to make ethical decisions where there are groups of people, and some of those people may benefit from the action, while others may not. However, while there are benefits to using this framework, there are also a number of disadvantages. For example, it can be quite difficult to predict the consequences of an action, so some actions that are expected to produce good consequences might actually end up harming people. Additionally, people sometimes react negatively to the use of compromise, which is an inherent part of this approach, and they recoil from the implication that the end justifies the means. It also does not include a pronouncement that certain things are always wrong, as even the most heinous actions may result in a good outcome for some people, and this framework allows for these actions to then be deemed ethical.

4.2 The duty framework The duty framework posits that one should focus on the duties and obligations that arise in a given situation and consider what ethical obligations arise. In doing so one can create a system of rules that encompasses consistency in expectations. So, if an action is considered to be ethically correct or a duty is required, the action or duty would apply to every person in a given situation. That is, everyone is treated equally and with dignity and respect.

However, this framework also has its limitations. Firstly, the duty framework can appear cold and impersonal, in that it might require actions which are known to produce harms, even though they are strictly in keeping with a particular moral rule. It also does not provide a way to determine which duty we should follow if we are presented with a situation in which two or more duties conflict. It can also be rigid in applying the notion of duty to everyone regardless of personal situation.

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4.3 The virtue framework The virtue framework posits that one identifies the character traits (either positive or negative) that might motivate us in a given situation. In this framework, one is concerned with what kind of individual we should be and what our actions indicate about our character. In the virtue framework, one would define ethical behaviour as whatever a virtuous person would do in the situation, and one would seek to develop similar virtues.

The primary advantage of this framework is that it permits a wide range of behaviours to be deemed ethical. This framework therefore recognises that there might be many different types of good character and many paths to developing it. Although this framework takes into account a variety of human experience, it also makes it more difficult to resolve disputes, as there can often be more disagreement about virtuous traits than ethical actions. Also, because the framework looks at character, it is not particularly good at helping someone to decide what actions to take in a given situation or determine the rules that would guide one’s actions. Also, because it emphasises the importance of role models and education to ethical behaviour, it can sometimes merely reinforce current cultural norms as the standard of ethical behaviour.

The three frameworks are contrasted in Table 3.

Table 3 Three ethical frameworks

Consequentialist Duty Virtue

Deliberative process

What kind of outcomes should I produce (or try to produce)?

What are my obligations in this situation, and what are the things I should never do?

What kind of person should I be (or try to be), and what will my actions show about my character?

Focus Directs attention to the future effects of an action, for all people who will be directly or indirectly affected by the action.

Directs attention to the duties that exist prior to the situation and determines obligations.

Attempts to discern character traits (virtues and vices) that are, or could be, motivating the people involved in the situation.

Definition of ethical conduct

Ethical conduct is the action that will achieve the best consequences.

Ethical conduct involves always doing the right thing: never failing to do one’s duty.

Ethical conduct is whatever a fully virtuous person would do in the circumstances

Motivation Aim is to produce the most good. Aim is to perform the right action. Aim is to develop one’s character.

Source: Brown University 2013.

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Summary This topic has provided a general discussion of the concept of ‘ethics’ and the types of behaviours that can obstruct a person from acting ethically. In addition, this topic has provided an overview of different ethical frameworks to assist in ethical decision making. As this topic has revealed, there are many types of barriers that can impact ethical behaviour. These barriers may arise as a result of a variety of factors including organisational culture, time pressure and client pressure. Obstacles may also arise because of a person’s particular personality traits. Knowing how to identify these barriers is a positive step towards encouraging ethical decision making. Another positive step is engaging in self-awareness or self-reflection as suggested in the virtue framework for ethical decision making.

One of the best questions one can ask to ensure that one does not engage in unethical behaviour is simply to ask oneself a reflective question — what kind of a person do you want to be? If the answer to that question is that you want to be a good person, then the answer will suggest that you want to act ethically. This question can be used in a variety of different contexts including in the workplace. For example, a lawyer might ask, ‘What kind of lawyer do I want to be?’ Similarly, a financial adviser might ask ‘What kind of financial adviser do I want to be?’ To understand how best to answer this question, it is necessary to understand what kind of person one is.

A simple approach to self-reflection is to ask ourselves questions about our values and perceptions. The following questions assist in this endeavour:

Values • What are 10 things that are really important to you? • What are the three most important things to you? • What are the values that you hold nearest to your heart?

Perception • How is the ‘public you’ different from the ‘private you’? • What do you want people to think and say about you? • Is it more important to be liked by others or to be yourself? Why?

‘Self-reflection may be the most critical ingredient to making good ethical choices.’ (Bashe 2012)

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Topic 1: Introduction to ethics, including individual …...2019/07/24 · Topic 1: Introduction to ethics, including individual cognitive bias and sources of judgment and decision