As Good As We Want To Be

Are you ethical?

Everyone thinks they are. In fact, if you ask a group of people to raise their hands if they’re more ethical than average, almost all the hands will shoot up. Part of this is cognitive bias—most folks think they’re better than average at most things. But ethics is particularly important, because so much of our economy depends on trust. From Enron to Bernie Madoff, we’ve seen that trust broken. But sometimes business practices designed to encourage good behavior actually remove ethics from the picture.

In a recent study participants were asked to play the role of a manufacturer in an industry that emitted a toxic gas. Some were told that they would be fined if they didn’t reduce emissions; the other group was encouraged to do so but faced no financial penalties. Surprisingly, the group that didn’t face the sanctions emitted less toxic gas than the group that did. Apparently, economic incentives removed the decision from the moral sphere and made it purely financial.

Ethical fading like this allows us to justify our own actions and overlook the unethical actions of others. Part of the reason is that our lives are so complex. When firms and individuals have too many roles, self-serving conflicts are bound to come up. One solution is to simplify: auditors should just audit; brokers should just transact; banks should just gather deposits and lend.

Good people unknowingly contribute to bad behavior. Only when we understand our own biases can we go beyond fines and disclosures and deal with our blind spots.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
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