[Professor Robert Prentice] Psychological tendencies and organizational pressures can
cause even good people to act unethically.
Consider loss aversion.
Loss aversion is our tendency to prefer avoiding losses to acquiring gains.
You probably won't be surprised to learn that people detest losses about twice as much
as they enjoy gains.
[Carolyn] So I was a soccer player when I was a kid and I had a really bad knee injury
and it prevented me from ever playing soccer again.
In the course of having many, many surgeries and in the interim of some of them, I wasn’t
really able to walk very well so that was another big loss.
And although I did get that ability back and I can now walk really successfully, I'm not
as happy about that.
I still definitely feel a significant loss about the ability to play soccer even though
I still have pretty significant abilities compared to others.
Loss aversion is also related to prospect theory, developed by Nobel Prize winner
Daniel Kahneman and Amos Tversky.
Prospect theory includes the notion that people will tend to take much greater risks to avoid
losing the things they have than they would have taken to gain them in the first place.
All this together means that people who perhaps inadvertently commit an unethical act will
often consciously decide to lie to cover up their inadvertent mistake.
In order to get his couching job in the first place, former Baylor University basketball
coach Dave Bliss probably would not have stooped so low as to try to pin a false drug dealing rap
on one of his players who had been murdered.
But in order to avoid the loss of that same job, Bliss did exactly that.
[Fernanda] So I was planning a faculty research presentation, which is just where faculty
come and present their research.
It’s pretty straightforward.
The way that, you know, I invoiced for the pizza wasn’t completely right so... and
I knew this, but I just needed to get the event out of the way.
And I'm not saying by any means that, you know, there was something huge there that
I did unethically but I still knew I wasn’t doing it right.
And I was very very scared of asking for help and loosing that respect and admiration that
I thought they had for me.
Bernie Madoff's massive Ponzi scheme may well be explained, in part, by loss aversion.
Madoff has explained that he had made trading errors before, but when it appeared that his
entire business model was wrong, he committed fraud not so much to get rich,
but to cover up his mistake.
He said, "I refused to accept the fact - could not accept the fact - that for once in my life
I had failed.
I couldn't admit that failure and that was a tragic mistake."
A study by Schrand and Zechman found that companies often unintentionally overstate
earnings, perhaps due to overoptimism, but this gets them into a situation where in order
to avoid having to admit an embarrassing error, they will begin intentionally misleading investors
to avoid a hit to their reputation.
I had a job that I ended up having to work crazy hours for.
I basically only did my job.
I didn’t have anything outside of that.
I wasn’t able to do extracurricular activities.
I gave up time with my family, and I made a lot of decisions in terms of prioritizing
that job that I wouldn’t have made in order to get the job.
But once I had it, I was really scared of “can I get another job if I let go of it?"
So I ended up making a lot of sacrifices for that job that if I had been looking at it
on paper when I had the job offer and they had said it's gonna take as many hours as it did,
I wouldn’t have accepted it in the first place.
Martin Grass, CEO of Rite-Aid Corporation, provides an example.
After being sentenced to eight years in jail for accounting fraud, Glass admitted:
"When things started to go wrong financially, I did some things to try to hide that fact.
Those things were wrong.
They were illegal.
I did not do it to line my own pockets."
[Dorine] When people are faced with losing their livelihood, I think that causes them
to make all kinds of drastic decisions that they wouldn’t normally make.
The impact of losing their job is going to impact their family... essentially their whole world.
Remember, Martha Stewart didn't go to jail for insider trading.
She went to jail for obstructing a federal investigation into that insider trading
in an attempt to avoid a loss of her reputation.
And the accounting firm Arthur Andersen was convicted not of securities fraud, but of
shredding two tons of documents to try to cover up its errors and to avoid potential fines.
To be ethical people, we have to monitor our own actions and motivations constantly.
And we may need to muster the courage to admit to even our most painful mistakes.
[Jacob] You just need to know before you put yourself in those situations because
once you get in that situation, it’s kind of “all bets are off,” and you can’t really stop yourself.
I think you need to keep that in mind, keep the context in mind.
It’s about creating an environment where people feel like they can take risks and chances
and that way, if they feel like they can do that, they can be honest about the outcomes
of those things.
[Michael] And I think a lot of times people are afraid to sort of look themselves
in the mirror and think, "If I lose something, you know, all of a sudden I've become something else.”
And maybe that’s good, maybe that’s bad, but in essence you can live with it.
And I think that people have a hard time sort of realizing that life goes on.