Unethical Decision Making in Organizations


Guido Palazzo (Professor of Business Ethics) & Ulrich Hoffrage (Professor of Decision Theory)

University of Lausanne

Week 1

  • Ethical and unethical decision making
Week 2
  • Introduction to unethical decisions in organizations
Week 3
  • The power of frames: How people construct their reality
Week 4
  • The power of routines
Week 5
  • The power of strong situations
Week 6
  • The power of institutions
Week 7
  • The wind of change: How to fight ethical blindness
Course Intro Reading: Narrow frames and strong contexts can push good people towards unethical decisions, how to protect yourself and your organization. High integrity people can break rules if they are put into a strong context, and become ethically blind over time. Learn why and under what conditions good people make bad ethical decisions, protect individuals, respect organizations against context, analyze organizational contexts, asses risks of unethical behaviour. Draw from management, psychology, sociology, philosophy. Develop a framework for understanding unethical behaviour and analyze scandals of recent decades.

Week 1 is ethical and unethical decision making, ask why do humans act in unethical ways, under what conditions, what motivates, understand human nature and culture, what is evil, why is this relevant for us, historic evolution of modern understanding of evil, discuss evil of different times and cultural contexts, deal with situations for ethical decision making using a tool box by Immanuel Kant.

Week 2 is introduction to unethical decisions in organizations, reflect on fairy tale to understand the power contexts have on individuals, look at Ford Pinto scandal, model ethical blindness (conceptual framework and backbone for whole course).

Week 3 is the power of frames and how people construct their reality, look at Enron scandal, discuss Lehman Brothers collapse and framings organizational language. Link decision making and language and discuss how language influences what we can see and how we decide. 

Week 4 is the power of routines, look at how people and organizations can simplify information processing and decision making by using heuristics and establishing routines, examine key driving forces of ethical blindness in organizations, demonstrate the risk associated with powerful routines in military innovation case study.

Week 5 is the power of strong situations, the environment of the decision maker, inspect immediate context, understand thinking and behavioural influences (most are the presence of other people), study effects via social psychology and look at classic experiments.

Week 6 the power of institutions, examine the impact of time on decision making, discuss third contextual layer of our model of ethical blindness (institutional context where organizations are embedded), discuss the impact of ideology on ethical blindness.

Week 7 is the wind of change and how to fight ethical blindness, defence strategies, fight as individuals and as leaders.

Week 1 & Learning Outcomes:
  • Relate & describe how modern thinking of evil has developed overtime
  • Compare evil as the result of an individual and conscious violation of reason with evil as the result of social structures and dynamics
  • Analyse ethical dilemma situations
  • Solve ethical dilemma situations and apply moral philosophy to daily dilemma situations
  • Formulate your own dilemma stories

1.2 A little history of Evil:
When making decisions, we are embedded in contexts. 
Theodicy problem: evil exists, god is benevolent (well meaning), god is omnipotent (all powerful).
In the premodern understanding, evil is the result of the fall of man. Our suffering is the punishment of God.
After Lisbon (earthquake and tsunami), evil gets disconnected from theology and gets analyzed as a social phenomenon.
Evil in its modern conception is a deviation from reason.
After Auschwitz, evil gets disconnected from reason. The analysis of evil starts to focus on the context in which decisions occurs.

1.3 Dilemma, how to make ethical decisions:
Old homogeneous societies shared same values and traditions embedded in the same context thus autopilot decisions but no real freedom. Modern society is pluralistic, heterogeneous, rules are unclear, high speed change/transformation, inovaction, globalization, drowning in data, hard to make sence, information overload.
With limited resources and unlimited desires to possess them, we have violence (domination), and rules.
Need to share rules through cooperation to increase the pie we get out of the limited resource, thus need trust. Thus avoid violence and increase cooperation. 
Dilemma: Two decisions; both look similar but we must choose one. Ex. Top salesperson has sick child and overall performance drops, boss states that you will not reach target. Fire the salesperson, or ask team for improvements?
Kantian Duty Ethics: act only if it can be a uncontradictory universal law.
Utilitarian: decision, regardless of right or wrong, depends on consequences (greatest benefit to the mass)
Tools: universalizability, utility, values - but how do we remain objective in strong contexts?
Week 2 & Learning Outcomes: 
  • Describe the power of strong context over reason and the main psychological forces that drive ethical blindness
  • Analyse modern organizations according to the fairy tale "The Emperor's new clothes" (by Hans Christian Andersen)
  • Apply the concept of ethical blindness to a case study (the Ford Pinto case).
2.1 The Emperor's new clothes I & II:
The power of reason should not be overestimated, what is the atmosphere in the environment, there is both fear for social (group pressure), authoritarian leadership and uncertainty about one's own evaluations, the tailor's story is written in the king's frame and preys on his vanity, we all make use of frames when we act in the world. We use frames to reduce complexity, but frames can be too narrow, thus we run into risks. The context can be stronger than reason. The routine can be stronger than the truth, and when the context is confirmed it can be harder for following members to discredit it; commitment can escalate in the dynamic.
  • Context can be stronger than reason
  • Actors might get trapped in a very narrow perception of reality (frame)
  • What looks irrational from outside a context might look completely rational from inside the context
  • Fear is a key driving force of irrational behaviour
  • Modern organizations may look similar to the kingdom
2.3 The story of the Ford Pinto
They calculated that the design was prone to fires when hit from behind, but it was cheaper to pay for the death, burns, and injuries instead of re-constructing the vehicles thus they continued to produce but eventually got charged for reckless homicide. The engineering team was not able to prove incompetence given the framework of the company thus was unable to action on their own ethics. There was time pressure, complexity, and other factors that created a dangerous frame. If you cannot say it, how can you see it?
  • The idea that bad things are done by bad people does not help to sufficiently explain unethical decisions in organizations.
  • Different layers of context (situation, organization, society) can build powerful constellations that switch off reason in decision makers.
  • In such context, decisions makers might get blinded for the ethical dimension of their decisions. They behave unethically, but they can not see it. 
2.4 The concept of ethical blindness I
Ethical blindness: decision maker's temporary inability to see the ethical dimension of a decision at stake. Context bound, good people doing bad things.
  • When ethically blind, actors deviate from their own values and principles. When making a decision, they cannot access those values.
  • Ethical blindness is context-bound and thus a temporary state. When the situation changes, actors will likely return to practicing their original values and principles.
  • Ethical blindness in unconscious. Actors are not aware of deviating from the rules of the game when making a decision.
Cognitive Frames: mental structures, that we use to construct reality.

2.4 - The concept of ethical blindness II
Three context layers are situational, organizational, institutional/societal.
Situational context: some situations are so powerful that they elicit similar and specific behaviour in many people forcing them to react.
Peer or majority pressure: one's own judgment would be correct, but when compared to others of differing judgment, they lose confidence in their own and join the majority.
Time pressure: people may act as if they have time and neglect the correct ethical action.
Organizational Context: orgs simplify our world perception and create increasingly homogeneous and simple world views among their members. Increasingly in successful organizations, the more feedback we receive the more we think we are right and the less we learn. Aggressive pressure of competition has a high change of narrowing a set of objectives and creating a narrow context.
Institutional Context: Are beliefs are embedded in a context, the institutions themselves embedded in a wider context. Strong norms, values, and practices can increase rigid framing. They can turn into dogmatic ideologies.
  • Ethical blindness results from a too narrow framing of decision making situations.
  • The frame we use to interpret the world and make our decisions is strongly influenced by the contexts in which we make our decisions.
  • Three contextual layers can be differentiated: situational, organizational, institutional.
Week 3 The power of frames: How people construct their reality
Learning outcome: 
  • Describe framing as one important aspect of ethical blindness
  • Discuss the advantages and disadvantages of mental frames
  • Describe how organizational cultures drive ethical blindness
  • Explain how social culture drives systematic rule breaking on all levels of organizations
  • Examine the ethical risks related to corporate language
3.1 How people make sense of their world
Framing: how people look at the world, how they construct reality.
Ex. Nurse administers wrong chemical and almost kills patient, board doesn't fire her but points out that chemical should not be in ward, should change the packaging to look different, should reduce nurses number of patients. Frames are often hard to see, and appear complete (whole, no gaps/issues) and exclusive, and hard to change.

3.2 The Enron Story: The culture lead to systematic rule breaking at all organization levels.

3.3 Lehman Brothers and the Power of Language: The bank collapsed because it was deeply investing in high-risk financial products. Manipulating language means manipulating thinking.

3.4 The Power of Language
Language can distort our thinking. What you can be just as important as how you say it. Metaphors create powerful physiological connections between reason and emotions in the brain (emotional resonance to abstract ideas). Inference patterns from one domain to another is the goal of metaphors when creating frames. Frames are constructed linguistically, which deeply impact what we do if they resonate strongly with our deep beliefs and values. Metaphors and labels are strong frame makers. Language however is also the best source for critically examining manipulation and for finding common ethical grounds with others.
Inattentional/perceptual blindness: when one fails to perceive an unexpected stimulus in plain sight due to a lack of attention rather than visionary defects.
Change blindness: failing to notice large changes to objects or scenes when the change coincides with a brief visual disruption.

Week 4 The Power of Routines:

Learning outcomes:
  • Contrast the classical view of decision making with the bounded rationality approach
  • Give examples of simple heuristics in people’s adaptive toolbox
  • Identify the role of organization for the creation of ethical blindness
  • Examine the mistakes that corporations make when they try to manage compliance risks
  • Analyse the dangers of powerful routines in organizations
4.1 Simple Heuristics:
Classical approach of unbounded has been challenged by bounded rationality, where we use heuristics as best guesses. Ex. Recognition heuristic goes for what is known. Take the Best focus on one attribute after the other and stops when an attribute is found that discriminates between the alternatives and makes the decision based on that attribute. Quickest is simple heuristic to make numerical estimates. Tallying sums up arguments without weight. Elimination-by-aspect eliminates alternatives based on thresholds until one is left. Most heuristics are great when a good solution is needed (not optimum) especially is situations where optimum is not known. Routine or adopting defaults is another heuristic. Heuristics may be applied in situations that can be evaluated from an ethical point of view.

4.1 Simple Heuristics Part II: 
Routine: set of custamry or unchanging and often mechanically performed activities or procedures; repetitive patterns of interdependent actions in the organization. They economize on cognitive resources, gain stability and reduce uncertainty. Create truce (micro stability) and store knowledge; are the starting point for and obstacle to learning. Will need to evaluate autopilot routines for ethicacy.
Ethical culture of organization: comprises all aspects and elements of an organization which influence the ethical conduct of its members. At the heart are the shared values and assumptions of the org, which include formal norms which give way to practices and routines, with the final being artifacts and symbols (slogan, speeches...).

4.2 Organizing for Ethical Blindness Part I:
Setting Objectives vs Unrealistic Objectives 
Designing Incentives vs One-dimensional Incentives
Evaluating Performance vs Darwinist evaluation systems (non-performers are losers/humiliated)
Aggressive leadership style, war rhetoric, rule ambivalence, disconnection from responsibility.

4.3 Organizing for Ethical Blindness Part II:
Organizations can embed decision makers in powerful contexts that push towards ethical blindness. Knowing that your employees might break the rules, you might create a compliance system around them; but the system is not effective because it is designed for criminals, not for good people. Ethical blindness describes the risk of good people doing bad things.

4.4 Gunfire at Sea - When habits are stronger than reason:
The power of routines and habits over reason. Routines result from the experience we make and the positive feedback we get for our decisions. Routines switch off reason because we do not need to think when executing them. In times of disruptive change, routines become a trap. We risk to make the wrong decisions without realizing it.   

Week 5 The power of strong situations:

Learning Outcomes:
  • Describe a strong situation
  • Identify different types of pressure
  • Describe the studies from social psychology that demonstrate the power of situations over individual intentions and character
  • Analyse how these pressures can overpower ethical considerations or may increase the risk of ethical blindness
  • Understand the impact of fear on decision making.
5.1 The Power of Strong Situations: Some situations are so powerful that they elicit a specific behaviour independently of their intentions, moral development, values or reasoning and are characterized by pressure (authority, peer, role, time). If you are not aware of the pressures you will be blind to the ethical dilemmas.

5.2 The Challenger Case: Time, role, precursor to succeed and authority pressure invalidated the engineering teams warnings to side with the business (managerial) team.
Personal Note: There is no business if the technical aspects don't work - destroyed spaceship is a negative business decision/outcome.

5.3 Fear and Unethical Decision Making: how fear provokes irrational behaviour, emerges in organizations and how it can even become a dominating emotion, a culture of fear increases the risk of unethical decision making in orgs. Fear can positively focus attention, be cautious but also has negative aspects. Irrational behaviour follows fear, and social context creates fear. Fear creates avoidance behaviour and pessimistic thoughts about the future thus we disconnect. Tunnel vision of context.
Confirmation bias: once we experience the world a certain way, we start to perceive only those pieces that confirm that belief.
Group Polarization: the more the group confirms our beliefs the more we disregard contradictory evidence.

Week 6 The power of institutions:

Learning Outcomes:
  • Describe the role of time in the development of ethical blindness
  • Analyse how organizational context can increase the risk of unethical blindness
  • Analyse the influence of institutions on behaviour
  • Apply institutional theory to the concept of ethical blindness
6.1 Shifting Baselines - The impact of time on decisions: ethical blindness is often the result of a process that unfolds over time. In an organization, the processes determine the structure and the structure determines the processes. Both the org and yourself changes.
We recognize change via an outside observer, and via noticing the differences of the reference system/point.
Just Noticeable Difference: the amount of something that must be changed in order for a difference to be noticable.
Shifting Baseline: each person measures the baseline as their subjective experience, for their given generation (fisherman example). Each day your identity changes to adopt that of the organizations`, thus the increase of ethical blindness, and we may do unethical things without noticing it.  

6.2 The power of Institutions: We are not aware of the most important things that shape our context, we take it for granted, we depend on it but don't realize that it is there.
Institutions: the norms and values, beliefs and practices that we take for granted in various larger social contexts in which we are embedded.
Isomorphism: when individuals enter an organization, the have to adapt to the rules of the game, copying the behaviour, values and beliefs of others to reduce uncertainty, and to create legitimacy for their actions.
Coercive Isomorphism: exposed to formal pressure by legal rules.
Mimetic Isomorphism: as a newcomer we adapt to the behaviour as others to reduce uncertainty. 
Normative Isomorphism: trained to have same beliefs and values and behaviours, we learn to maximize profits.
What we believe and what we do is under strong influence of the institutions in which we are embedded.
Institutions therefore set behavioural and cognitive limits.
As a result, institutions might reinforce situational and organizational forces that drive us towards ethical blindness.

6.3 The Ideological Power of Capitalism: Institutions can turn into rigid ideologies, they are perceived as true. Ideologies are structure simplifications. Shareholder value ideology promotes greed as a virtue and shareholder value maximization as the only moral responsibility of a manager. It can promote ethical blindness when aligned with organizational and situational forces that push in the same direction.

6.4 Types of Unethical Behavior Part I:
Types of care: care about others in a negative way/want to harm (psychopathy, revenge, moral entitlement), don't care about others and harm doing is a byproduct of action (deeply seeded conviction that self interest is best, in our own best interest to be nice especially if low cost, shareholder value maximization thus greed is good), you care about them but still do harm despite good intentions.

6.5 Types of Unethical Behavior Part II (care but still harm):
We become habitually accustomed to not seeing the ethical dimension of our decisions, moral disengagement (those who morally disengage from unethical action are more likely to take the action).

Mechanisms of Moral Disengagement:
  • Moral Justification
  • Euphemistic Labelling
  • Advantageous Comparison
  • Displacement of Responsibility
  • Diffusion of Responsibility
  • Disregarding or Distorting Consequences
  • Blaming the Victim
  • Dehumanizing the Victim
Week 7 The wind of change: how to fight ethical blindness

Learning Objectives: 
  • Design individual defence strategies against ethical blindness
  • Design organizational defence strategies against ethical blindness
  • Describe your own defence strategy against ethical blindness in your own organization
  • Synthetize the lessons learnt from the course for your decision making in the future
7.0 Nudging: any aspect of the choice architecture that alters people's behaviour in a predictable way without forbidding any options or significantly changing their economic incentives. A nudge is easy to avoid and allows for simple intervention, they are not mandates. Ex. Having fruit visibly present is a nudge, banning junk food is not. It is a tool for libertarian paternalism.
If you want to promote ethical behaviour, talk about it and use social majority inclusion as the persuasive factor.

7.1 Mindfulness and Moral Stretching Part I:
Flexible framing: a defensive strategy to apply a more holistic and broader view to a decision at stake.
Remove time pressure and social norms to allow for independent and relaxed thought.

7.2 Mindfulness and Moral Stretching Part II:
We overestimate our integrity, removing oneself from the routine and context help reassess the situation.
Ask yourself:
  • What are my values?
  • What is important for me?
  • What is not negotiable?
  • What kind of compromise am I willing to make?
  • At what kind of life do I want to look back when I'm about to die?
    • Personal note: I don't think it is correct to judge one's life as a summary and it should be judged as a progression. A singular summary is subject to both positive and negative thoughts and doesn't confront the aspect of human growth which is a changing value, thus a person who transcends their "evil" personality traits or rather someone who works on improving their context/mindfulness/frames should summarize (as a singular value) only their N% of life (where N is the  post-transition to good).  
  • What is my idea of a good life summarized from the end of it?
  • What is my vision of a good life?
  • How do I want to go there from here?
Mindfulness: step out of your routine and decide consciously.
Moral Imagination: imagine a broader set of consequences and options.
Self-Knowledge: develop a deep knowledge of yourself, values, beliefs, and vision of life.
Moral Stretching: the right behaviour results from the constant training of your character.

7.3 How to Protect Organizations against Ethical Blindness:
  • Factors in organizational ethical blindness
  • Our time pressure is intense
  • We are completely absorbed by our work
  • The pressure to perform is very strong
  • Our objectives are not realistic
  • If somebody doesn't fit in, they don't last long
  • The language used in our company is aggressive
  • Fear is a widespread feeling in our company
  • Factors that combat organizational ethical blindness 
  • Communicate organization values clearly
  • Be open to others' critical statements 
  • Encourage reason-based dissent
  • Be clear about the rules of the game
  • Don't lead with vague and ambivalent messages
  • Don't leave people confused about the rules
  • Questions to continuously ask
  • Are we maintaining the same level of integrity standards?
  • Are we relaxing standards?
  • Is ethical misconduct made transparent, corrected or do we rather not talk about it?
  • Do we apply the code of conduct without exceptions?
  • Do we deal with compliance issues early and thoroughly?
Leaders can influence an organization's context in which others make decisions. Analyze factors that may increase ethical blindness risk within the organization. Manage these factors to reduce pressures.