When Bad Decisions Happen to Good People

I just listened to a recent Planet Money podcast that brought in the psychology to explore why people commit fraud.

To wit: they interviewed a pretty decent, upstanding guy who promised his dad he’d NEVER EVER EVER commit the kind of fraud that got his brother into jail. But who, a few decades later, went to jail for fraud.

It turns out that there are at least 2 “frames”–structures of thinking–that override the ethical mindset.

1. If you are used to a business-type way of thinking, with business training and business concerns at the forefront of your mind, you will not approach a problem ethically. Instead, you will think about a problem in business terms: profit, cost, competition, handshakes, and suits. There is science to prove this.

2. Empathy will override ethics. Very frequently. So if you feel sorry for your friend and want to help, you won’t think about her situation in ethical terms.

In short, there are many contexts in which ethics will never ever occur to you, no matter how “good” a person you are.

The Planet Money team offered a few practical suggestions for ways to foreclose on the possibility of fraud. Like, put in big letters at the top of every legal and financial document (like loan applications) LYING ON THIS DOCUMENT IS ILLEGAL AND UNETHICAL. Or force companies to rotate auditors frequently to prevent an overly close relationship that may lead to empathy. Yes! Do it!

Also: make a far greater push in business schools to focus on ethics and the myriad ways that ethical frames will get pushed out of the mind’s way in daily business life.

Make sure white collar criminals are prosecuted swiftly and punished appropriately. For example, in last year’s New Yorker article about the Raj Rajaratnam’s conviction, many Wall Streeters interviewed agreed that people feel that fraudulent acts are very low risk because the SEC is not a credible law enforcement agency with poor coordination with the FBI.

Wall Street regarded [the SEC] with disdain, and when companies under investigation were called to give testimony their executives may have felt little reluctance to lie, which carried far less risk than admitting to a crime under oath in a civil action.

And also

As for the larger financial system, in Washington, D.C., implementation of the Dodd-Frank regulatory reform law has been slowed, if not yet sabotaged, by lobbying on the part of the big banks and a general ebbing of will among politicians. Neil Barofsky, the former inspector general of TARP, said, “Is Tim Geithner going to have the political will to take on the size and interconnectivity of the largest banks? Nothing in his previous career suggests he would.” Barofsky went on, “It is a remarkable failure of our system that we’ve not addressed the fundamental problems that brought us into the financial crisis. And it is cynical or naïve to imagine it won’t happen again.”

It would be great to attack financial misdeeds with both top-down regulation with teeth and bottom-up MBA training, as well as the extremely pragmatic changes, like adjusting standard documents to put an ethical framework literally first, at the top of the paper.

But it’s stunning to me how easily an ethical way of thinking gets shoved aside. Makes one wonder how many other endeavors operate in an ethics-free mental frame (coughcoughpoliticssneeze).

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3 thoughts on “When Bad Decisions Happen to Good People

  1. Inder says:

    In my job, I have seen first hand how folks who see themselves as basically good, ethical people, wanting the best for their community will sometimes make unethical decisions (not as crazy as outright fraud – usually more borderline stuff), and they often rationalize it to themselves (and to me) by explaining that those rules don’t apply to them because *they* are not unethical or bad people (the rules were written for bad people! of course!).

    Often I will hear this even when, from my outsider perspective, I can see that financial interests or personal bias are CLEARLY clouding a person’s ability to act impartially. Yet, in that person’s head, they are acting selflessly in the best interests of the community (whose interests are naturally, aligned with their financial interests! of course!).

    As my boss once said, and I cannot believe how true this is: I’m amazing to see what a blind spot most people have when it comes to their own interests. And this definitely includes people who otherwise are spotless in their ethical conduct. It’s amazing.

    So I think a lot of folks start into something like this quite innocently – like you say, acting in empathy, or out of expediency, but not really thinking of what they’re doing as “ethically wrong” (because those rules apply to other people). Then they find themselves in deep, and self-protection takes over. That’s just my guess.

    • Elizabeth says:

      Yup. That’s exactly what happened to the guy they interviewed. How interesting that you see it so often in your job!

      People’s actions match their self-conceptions. Mine sure do. It makes a lot of sense.

      • Inder says:

        I deliver ethics trainings, and everyone nods their head the whole time. But later, when I have to give the advice, even on matters where Joe Regular out on the street would agree there is an obvious conflict (so, even where we’re not talking technical or counterintuitive rules of law, of which there are certainly plenty), I often hit surprising resistance. It turns out there is a reason that these laws need to exist!

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