Are you a good person?

Photo: Joe Murphy. Source: Pixabay

Most folks think they are. In fact, ask a group to raise their hands if they’re more ethical than average, and almost all the hands will shoot up. Part of this is personal bias—we think we’re better than average at most things. But ethics is particularly important: so much of our economy depends on trust. From Enron to Bernie Madoff to the Panama Papers, that trust has been broken again and again. But sometimes regulations designed to encourage good behavior have the opposite effect

In a recent study participants were asked to play the role of a manufacturer in an industry that emitted 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. It turned out that the group that didn’t face financial penalties emitted less pollution than the group that did. Apparently, economic incentives removed the decision from the moral sphere and made it purely financial.

Psychologists call this “ethical fading”: we get so wrapped up in the details of a decision that its ethical dimension fades from view. When this happens, we tend to justify our actions and overlook the unethical actions of others. Part of the reason is that our lives are so complex. When companies and individuals have too many roles, self-serving conflicts are bound to come up.

“Allegory of the Morality of Earthly Things” by Tintorertto, c. 1585. Source: Wikipedia

One solution is to simplify: auditors should just audit; brokers should just transact; banks should just gather deposits and lend. And when you’re facing a potential fine, you need to look past the purely financial aspect and ask what’s right—not just what’s expedient.

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

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
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