Ethical Leadership and the Psychology of Decision Making

The focus is on three sources of error arising in:

1.     Theories about the world:

-       Beliefs we hold about how the world works,

-       the nature of the causal network in which we live,

-       the ways in which our decisions influence the world, especially beliefs the probabilistic or deterministic texture of the world (and degrees of freedom)

2.     Theories about others

-       Beliefs about how “we” are different from “them,” or they are different from us

-       Often such beliefs are unconscious

3.     Theories about ourselves

-       Unrealistic belief about ourselves may cause us to:

-       Underestimate our exposure to risk

-       Take more than our fair share of the credit for success or too little for failure

-       Be too confident that our theory of the world is the correct one

-       Be unclear about our talents and weaknesses

Theories about the World

Successful executives must have accurate knowledge of their world. If they lack this knowledge, they must know how to obtain it.

One typical challenge is how to assess the risk of a proposed strategy or policy, which involves delineating the policy's consequences and assessing the likelihood of various possibilities. If an executive does a poor assessment of a policy's consequences, there may be problems.

There are three components to our theories of the world: (a) the consideration of possible consequences, (b) the judgment of risk, and (c) the perception of causes. [Note:  There are classical subsets or “parts” of prudence covering each of these.  More on this in due course.]

1.     The Cascade of Consequences

"You can never do just one thing.”  Major decisions have a spectrum of consequences, not just one, and especially not just the intended consequence. Everyday experience as well as psychological research suggests that, in making complex choices, people often simplify the decision by ignoring possible outcomes or consequences that would otherwise complicate the choice. In other words, there is a tendency to reduce the set of possible consequences or outcomes to make the decision manageable. In extreme cases, all but one aspect of a decision will be suppressed, and the choice will be made solely on the basis of the one privileged feature. The folly of ignoring a decisions possible consequences should be obvious to experienced decision makers, but there are several less obvious ways in which decision errors can create moral hazards. The tendency to ignore the full set of consequences in decision making leads to the following five biases: a) ignoring low-probability events, b) limiting the search for stakeholders, c) ignoring the possibility that the public will "find out," d) discounting the future, and e) undervaluing collective outcomes.

a)     Ignoring Low Probability Events

-       If a new product has the potential for great acceptance but a possible drawback, perhaps for only a few people, there is a tendency to underestimate the importance of the risk.

b)    Limiting the Search for Stakeholders

-       Getting blind-sided by unanticipated consequences to an altogether different group. A careful analysis of the interests of the stakeholders (those persons or groups whose welfare may be affected by the decision under consideration) is essential to reasonably anticipating potential problems.

c)     Ignoring the Possibility the Public will “Find Out”

-       Executives should ask, "What would the reaction be if this decision and the reasons for it were made public?" If they fear this reaction, they should reconsider the decision.

-       A decision or policy that must be hidden from public view has the additional risk that the secret might be revealed. Damage to self-respect [we did that and now we have to live with that fact] and institutional respect of those who must implement and maintain the concealment should also be considered a consequence.

d)    Discounting the Future

-       The consequences of decisions cascade not only over people and groups, but also over time. Figuring out how to address the entire temporal stream of outcomes is one of the most challenging tasks executives face.  (Short term or long term perspective?)

e)     Undervaluing Collective Outcomes

-       My actions have consequences for others, perhaps an entire industry (Country? Family? School?). There is a tendency to treat these collective costs as externalities and to ignore them in decision making. To do so, however, is to ignore a broad class of stakeholders whose response could be, "If they voluntarily ignore the collective interests, then it is in the collective interest to regulate their activity."  Result: More rules, less freedom to be creatively prudent.

-       Ethical decisions must be based on accurate theories about the world. That means, at a minimum, examining the full spectrum of a decisions consequences. Our research suggests that a set of biases reduces the effectiveness of the search for all possible consequences.

2.     Judgment of Risk

Theories of the world will be inaccurate if they systematically fail to account for the full spectrum of consequences associated with decisions. And they will be inaccurate if they systematically err in assessing the probabilities associated with the consequences.

a)     Denying Uncertainty

-       Looking for (expecting? demanding?) certainty in an uncertain world. They want to know what will or did happen, not what may or might happen or have happened. People find it easier to act as if the world were certain and deterministic rather than uncertain and often unpredictable. What people want to hear is not what might happen, but what will happen. When executives act as if the world is more certain than it is, they expose themselves to poor outcomes, for both themselves and others. It is simply foolish to ignore risk on one's own behalf, but it is unethical to do so on behalf of others.

-       “Fooled by randomness”: we misperceive chance events.  Coincidence is not causality.

-       One implication of the belief in a deterministic world is the view that evidence should and can be perfect.  It never is. How close does it need to be? (Making prudent judgments given all the available evidence, if the evidence was gathered honestly without bias.  “Confirmation bias.”)

-       We believe in a deterministic world in some cases because we exaggerate the extent to which we can control it.  (“Experts”)

-       “Hindsight bias”: In situations in which our expectations or predictions were wrong, we often misremember what our expectations were. We commonly tend to adjust our memories of what we thought would happen to what we later came to know did happen. This insulates us from understanding our errors.

-       We fail to appreciate the role of chance if we assume that every event that occurred was, in principle, predictable. The response "I should have known . . ." implies the belief that some future outcome was inherently knowable, a belief incompatible with the fact that essentially random events determine many outcomes.

b)    Risk Trade-offs

-       Uncertainty and risk are facts of executive life.  What level of uncertainty and/or risk is acceptable?

-       One unhelpful answer: No risk. Any price is worth paying for complete safety. The illusion that a riskless world can be created is a myth that is consistent with a theory of the world that minimizes the role of chance.

-       A certain premium seems to get attached to situations in which all risk can be eliminated.

-       Result: misdirected risk-reduction efforts, saving fewer lives at greater cost.

c)     Risk Framing

-       How is the situation being “framed”?  Primarily as attaining a positive or as avoiding a negative?  What is the risk? Job losses: lose some or risk losing all?  (Moral purity?  Universal moral principles or rules?  We never abandon a fellow worker.)

-       If different stakeholders have different frames, the potential for moral disagreement is great. (Understanding the other person’s moral “frame”; being clear about yours.)

   3. Perception of Causes

-       Being aware of the beliefs we hold about the causal texture of the world, about why things happen or don’t happen.

-       Judging causal responsibility is often a precursor to judging moral accountability and to blaming or praising a person, organization, or policy for an outcome. However, even under the best of circumstances, causation is usually complex, and ambiguity about causation is often at the heart of disputes about responsibility, blame, and punishment.  (What caused the boat to capsize?)

-       Focus on People: tendency in most cases is to blame a person, not a faulty system

-       Different events: Theories about causes often lead people to disagree, because they are explaining different events (often without knowing that this is the problem).  Why is life more expensive?  (What caused prices to go up? What caused income to go down or not keep pace?)  General event or specific event? (Why is my take-home pay less? vs. Why haven’t the workers received a pay raise in five years?)

-       Sins of Omission:  What wasn’t done that needed to be done?  It is an old adage that evil prevails when good people fail to act, but we rarely hold the "good" people responsible for the evil they failed to prevent.  (Are they responsible?  As responsible or partially?  Or in some circumstances not at all?)

Theories about Other People

Do we have erroneous ideas (theories?) about other people? Other groups of people?  (“us” vs. “them”)

1.     Ethnocentrism

-       This perception that "our" way is normal and preferred and that other ways are somehow inferior. The world revolves around our group, and our values and beliefs become the standard against which to judge the rest of the world. (Note, this wouldn’t always be associated with an “ethnic” group, depending upon how broadly one understands that term.  “In” group favoritism. “You people are weird.”  You white people, you Asian people, you people who go to Texas A & M, you Texans, you Southerners, you computer programmers, you women, you men), which brings us to the next category:

2.     Stereotypes

-       In addition to the "theory" that "our" group is better than others, we often have specific beliefs about particular groups, which constitute implicit theories about people in these groups.

-       Like ethnocentrism, stereotypes are dangerous because we are often unaware of their influence. We tend to think that our beliefs about groups are accurate, and we can often draw on experience to support these beliefs. (But we had those experiences through a certain interpretive lens.)

-       How can we guard against the dangers of ethnocentric and stereotypical theories? Starting with ethnocentrism, we should question arguments based on the belief that "they" are different from "us." The safest assumption to make, in the absence of contrary evidence, is that "they" are essentially the same as "us" and that if we want to know how "they" will react to a situation, a wise first step is to ask how "we" would react. Historically, far more harm has been incurred by believing that different groups are basically different than by assuming that all people are essentially the same.

Theories about Ourselves

These problems are not associated with low self-esteem.  But note, there are problems with low self-esteem as well.  In fact, many successful people slingshot back and forth between inferiority and superiority complexes.  The goal is to have an accurate sense of oneself: both ones’ strengths and weaknesses.  If we were to give this virtue a name, classically, it is called “humility.” 

1.     The Illusion of Superiority

a)    Illusion of Favorability

-       This illusion is based on an unrealistically positive view of the self, in both absolute and relative terms. For instance, people highlight their positive characteristics and discount their negatives. In relative terms, they believe that they are more honest, ethical, capable, intelligent, courteous, insightful, and fair than others. People give themselves more responsibility for their successes and take less responsibility for their failures than they extend to others. People edit and filter information about themselves to maintain a positive image, just as totalitarian governments control information about themselves.

b)    Illusion of Optimism

-       This illusion suggests that people are unrealistically optimistic about their future relative to others. People overestimate the likelihood that they will experience "good" future events and underestimate the likelihood of "bad" future events. In particular, people believe that they are less susceptible than others to risks ranging from the possibility of divorce or alcoholism to injury in traffic accidents. To the extent that executives believe themselves relatively immune from such risks, they may be willing to expose themselves and their organizations to hazards.

c)     Illusion of Control

-       The illusion of optimism is supported by the illusion of control that we referred to earlier. One reason we think we are relatively immune to common risks is that we exaggerate the extent to which we can control random events.  (Indeed, the belief that one is exempt from these illusions, while others are not, is an excellent illustration of the illusion of optimism.)

2.     Self-Serving Fairness Biases

-       Most executives want to act in a just manner and believe they are fair people. Since they are also interested in performance and success, they often face a conflict between fairness and the desired outcome. They may want a spacious office, a large share of a bonus pool, or the lions share of the market. Furthermore, they may believe that achieving these outcomes is fair because they deserve them. Different parties, when judging a fair allocation among them, will often make different judgments about what is fair, and those judgments will usually serve the party's interest. These judgments often reflect disagreements about deservedness based on contributions to the collective effort. It is likely that if you asked each division in your organization to estimate the percentage of the company's worth that is created by the division, the sum of the estimates would greatly exceed 100 percent. (Research has been shown this to be true with married couples. The researchers who did the study reported that they had to ask the questions carefully because spouses would often be amazed, and then angry, about the estimates that their mates gave to questions like, "What percentage of the time do you clean up the kitchen?")

-       One important reason for these self-serving views about fairness is that people are more aware of their contributions to collective activities than others are likely to be; they have more information about their own efforts than others have or than they have about others.

-       Furthermore, executives, like other people, credit themselves for their efforts, whereas they are more likely to credit others only for their achievements. They also credit themselves for the temptations that they resisted but judge others strictly by their actions, not by their lack of action.

-       Egocentric interpretations of fairness hinder conflict resolution because each party believes that its own demands are fair and thus is unwilling to agree to what it perceives as inequitable settlements. It is not just a matter of different interests, it is a matter of what is fair and proper. The difference in perspectives can lead parties to question each others’ ethics and morality. The temptation to view the other side as immoral when they fail to agree with us.

3.     Overconfidence

-       Most people are erroneously confident in their knowledge.

-       The danger of overconfidence is, of course, that policies based on erroneous information may fail and harm others as well as the executive who established the policy. Overconfidence, as part of our theories about ourselves, coupled with flawed theories about the world or about other people, poses serious threats to rational and ethical decision making.

-       To the degree to which people are overconfident in their (conservative) risk assessments - in their beliefs about the availability of scarce resources or the character of people unlike themselves - they will fail to seek additional information to update their knowledge. One cost of overconfidence is a reluctance to learn more about a situation or problem before acting.

-       Even if people acknowledge the need for additional information, research has shown that their process for gaining that information may be biased to confirm prior beliefs and hypotheses. (confirmation bias)

-       What question are you asking? ("This really is a safe grip, isn't it?")

-       Will feedback help to eliminate or reduce these biases? We believe that feedback may provide only limited help because of the tendency to seek and notice confirming information, which forms an additional barrier to learning through experience.

When we consider the combined impact of the three processes described in this section — the illusion of superiority, self-centered perceptions of fairness, and overconfidence — we can see the peril associated with erroneous theories of the self. The major peril is that we will come to see ourselves as people for whom the normal rules, norms, and obligations do not apply. The danger is that an executive, especially a successful executive, will hold himself above conventional ethical principles and subject himself only to self-imposed rules that others might judge to be self-serving. He might justify telling a lie on the ground that it permits him to achieve important benefits for others (such as shareholders or employees) even though the shareholders or employees are being duped. He might feel that inflating an expense account or using company property for personal ends is not "really" wrong because of the value that he contributes to the company. Finally, he may undertake an immoral or illegal act, convinced that he will never be caught. The tendencies to feel superior, to generate self-serving, on-the-spot moral rules, and to be overconfident about beliefs create the potential for moral shallowness and callowness.

Improving Ethical Decision Making

Poor ethical decisions are often the same as the causes of poor decisions generally; decisions may be based on inaccurate theories about the world, about other people, or about ourselves.

1.     Quality

- A general principle is that the types of flaws and biases we have discussed are likely to influence decision making more when decisions are intuitive, impulsive, or subjective rather than concrete, systematic, and objective.

- Reliable evidence about (close attention to) the real world.  (Warnings about “data” and “numbers.”)

- Reasoning by anecdote is usually foolish.

- A corollary is that getting high-quality data is obligatory. (What are you measuring? How are you measuring it? What is your measure actually measuring? What small slice of the world are you seeing?)

- Sometimes (all the time?) executives cannot escape making decisions and judgments on subjective bases. But they can take steps to prevent some of the biases from distorting judgment. To combat overconfidence, for instance, it is effective to say to yourself, "Stop and think of the ways in which you could be wrong." Similarly, to avoid minimizing risk, you can ask, "What are the relevant things that I don't know?"  Often, a devil's advocate, who is given the role of scrutinizing a decision for false assumptions and optimistic projections, can play this role. (What are your checks and balances?  If you don’t have any, you’re asking for trouble.)

- One threat to rational and ethical decision making that we noted earlier stems from the untrustworthiness of human memory. The first step in managing this threat is to acknowledge it. The second is to compensate for it with improved, detailed record keeping.

- Quality management and ethical management are close companions; what promotes one generally promotes the other. Erroneous theories threaten both.

2.     Breadth

-       By breadth, we mean assessment of the full range of consequences that policies may entail.

-       Openness itself is often a signal to potential opponents that nothing is being hidden and there is nothing to fear. (honesty, transparency:  you can’t fake it)

-       A company is (and persons are) part of a broader community that has an interest in its actions. A full accounting for decisions must include a community-impact assessment.

-       One’s decisions affect those not only in the present but also in the future.

-       Breadth is an important quality of ethical decision making because it is both ethically proper and strategically sound. It means doing the right thing and doing the smart thing. Intentional decisions to exclude stakeholders' interests or input may not only violate their rights, which is an ethical infraction, but also invite opposition, resentment, and hostility, which is stupid.

3.     Honesty

-       In discussing breadth, we urged openness. But executives can rarely divulge all the information involved in a decision. A policy of openness does not require executives to tell all. It is perfectly ethical and appropriate to withhold some types of information. It is inappropriate to withhold information about a project or policy merely because an executive is ashamed to make it public. We propose that, if an executive feels so embarrassed about some aspect of a project that she wants to hide the information, she probably should not undertake the project. If an idea cannot stand the light of day or the scrutiny of public opinion, then it is probably a bad idea. A variant of this "sunshine test" is to imagine how you would feel if you saw the idea or decision on the front page of the New York Times.

-       We ourselves are the easiest audience that we have to play to and the easiest to fool. Consequently, we should imagine whether our audience would accept the idea or decision. In particular, we should ask whether the people with the most to lose would accept the reasons for our actions. If not, we are probably on moral thin ice.

-       One risk often overlooked when practicing deceit is the continual need to maintain deception. Not only are original facts hidden, but the fact of hiding must also be hidden.

-       While it is important to be honest with others, it is just as important to be honest with yourself. Self-deception — being unaware of the processes that lead us to form our opinions and judgments — is unavoidable. We think we remember things accurately, but careful studies show that we do not. We think we know why we make judgments about other people, but research shows us other reasons.

-       If we can accept the fact that the human mind has an infinite, creative capacity to trick itself, we can guard against irrational, unethical decisions. To deny this reality is to practice self-deception. We can learn to suspect our naive judgments. We can learn to calibrate ourselves to judge risk. We can examine our motives in judging others; are we using hard, reliable information to evaluate subordinates, or are we using stereotypes?

The topic of executive ethics has been dominated by the assumption that executives are constantly faced with an explicit trade-off between ethics and profits.  Most people do not say to themselves, “Now I will do the morally bad thing.”  Most decisions are not usually so explicit.  If it seemed “really, really evil” or “just plain stupid,” most of us wouldn’t have done it in the first place.

Parts of Prudence

Potential parts of prudence:  the virtues connected with it:

"good counsel," which concerns counsel,

"synesis," which concerns judgment in matters of ordinary occurrence,

"gnome," which concerns judgment in matters of exception to the law

Subjective parts of prudence:  prudence in different areas

-       The prudence whereby a man rules himself vs. the prudence whereby a man governs a multitude.

-       Again, the prudence whereby a multitude is governed, is divided into various species according to the various kinds of multitude. There is the multitude which is united together for some particular purpose; thus an army is gathered together to fight, and the prudence that governs this is called “military.”

-       There is also the multitude that is united together for the whole of life; such is the multitude of a home or family, and this is ruled by “domestic prudence.”

-       And such again is the multitude of a city or kingdom, the ruling principle of which is “regnative prudence” in the ruler, and “political prudence” in the subjects.

Integral parts of prudence: skills and abilities we would need to strengthen to help people make prudent judgments.

Intelligentia: the understanding of first principles;

Ratio: Discursive reasoning and the ability to research and compare alternatives   

Memoria: accurate memory; that is, memory that is true to reality, and an ability to learn from experience

Docilitas: (teach-ability): an open-mindedness that recognizes variety and is able to seek and make use of the experience and authority of others

Sollertia (eustochia: good conjecture): shrewdness or quick-wittedness, i.e. the ability to evaluate a situation quickly;

Providentia: foresight – i.e. the capacity to estimate whether particular actions can realize goals

Circumspection: the ability to take all relevant circumstances into account;

Caution: the ability to understand and mitigate risk.