THE CASE OF ENRON - storage.googleapis.com€¦ · THE CASE OF ENRON . Robert Prentice, JD...

FAULTY DECISIONS:

THE CASE OF ENRO

N Teaching Ethics, H

euristics and Biases

Robert P

rentice Journal of B

usiness Ethics E

ducation (2004) Volum

e I, Issue I, pp.57-74

Em

anuel Lauria M

arch 28, 2015

Robert Prentice, JD Professor and Departm

ent Chair (Interim), Business,

Governm

ent and Society, McC

ombs School of Business,

University of Texas

Robert P

rentice is a lawyer w

ith a focus on corporate governance, regulatory oversight and ethical decision m

aking. He is

an expert on securities fraud, insider trading, the value of securities regulation and the legal liability of accountants. H

e is the founding chair of the new

ly-created department at M

cCom

bs: Business,

Governm

ent and Society.

Prentice has w

on numerous teaching aw

ards and is a mem

ber of U

T's Academ

y of Distinguished Teachers. P

rofessor Prentice has

published more than 30 m

ajor law review

articles on such topics as securities law

litigation, tender offers, insider trading, securities regulation and the Internet, accountants' legal liability, and products liability.

Introduction

• Prentice extends the pioneering w

ork of Tversky and Kahnem

an (recall fall sem

ester ED

B 9110)

• Heuristics and biases that can result in system

atically suboptimal decision

making m

ay also lead to unethical decision making

• Result is that even w

ell-intentioned people can be susceptible to comm

itting unethical or even illegal acts

• Core problem

: for the most part, business and law

schools have ignored this body of psychological know

ledge

• Purpose of this paper is to present inform

ation on how decision m

aking heuristics and biases can lead to unethical behavior as a basis for lectures on professional ethics

Summ

ary of article • A

uthor presents a series of decision making heuristics and biases from

the perspective of ethical decision m

aking

• Prentice uses both historical (e.g., M

ilgram, 1963 re: obedience to authority)

and contemporary (e.g., E

nron, c. late-1990s re: self-serving) research exam

ples to illustrate ethical issues

• Biases do not necessarily act independently; can overlap and exacerbate

negative tendecies

• Educating students on the existence and operation of ethical w

eaknesses in decision m

aking is important, to m

inimize the susceptibility of w

ell-meaning

people to heuristics and biases, but…

Summ

ary of article • A

uthor presents a series of decision making heuristics and biases from

the perspective of ethical decision m

aking

• Prentice uses both historical (e.g., M

ilgram, 1963 re: obedience to authority)

and contemporary (e.g., E

nron, c. late-1990s re: self-serving) research exam

ples to illustrate ethical issues

• Biases do not necessarily act independently; can overlap and exacerbate

negative tendecies

• Educating students on the existence and operation of ethical w

eaknesses in decision m

aking is important, to m

inimize the susceptibility of w

ell-meaning

people to heuristics and biases, but…

• …despite experience and training, debiasing these tendencies is very

difficult to accomplish

Teaching business ethics: A progressive approach

Familiarization w

ith professional codes of conduct


Familiarization w


Sensitization to ethical dilemm

as


Familiarization w



as

“Preaching” about cognitive and behavioral susceptibilities

“Cheerleading” to “do the

right thing”


Familiarization w



as

“Preaching” about cognitive and behavioral susceptibilities

“Cheerleading” to “do the

right thing”

INO

CU

LATING

STUD

ENTS R

EGA

RD

ING

ETHIC

AL W

EAK

INESSES IN

TH

EIR O

WN

DEC

ISION

MA

KIN

G PR

OC

ESSES

Heuristics and biases: ethical applications D

escription W

orkplace examples

Research

Obedience to

authority “just follow

ing orders” P

ersonal ethics give way to

institutional pressure D

eZoort & Lord,

1994

Social proof

Taking cues of what

constitutes proper behavior from

others

Desire to be a team

player; groupthink

Ash, 1952, 1956

False consensus effect

Tendency to believe that others think the w

ay we do

Misplaced trust in the true

ethical standards superiors R

oss, et al., 1977

Overoptim

ism

“The glass is always

more than half full”

Honestly-held, yet irrational

views of D

s & O

s Langevoort, 1997

Overconfidence

All of us are are m

ore ethical than all of our com

petitors

Translating confidence in ones’ ow

n skills to imply

ethical correctness

Kennedy &

P

eecher, 1997

Self-serving bias “because I’m

worth it”

Affirm

ing the clients’ best interests, even w

hen your ethics m

ay become

comprom

ised

Prentice, 2000a

Heuristics and biases: ethical applications, cont. D

escription W

orkplace examples

Research

Framing

Importance of decision

making context

CE

O overem

phasizing m

aximization of shareholder

value

Blair, 2002

Process “slippery slope”

Sm

all, incremental ethical

lapses Tversky, 1969

Cognitive

dissonance Avoidance of uncom

fortable psychological inconsistency

Inability to accurately process new

, contradictory inform

ation

Prentice, 2000b

Sunk costs Throw

ing good money

after bad (escalation of com

mitm

ent)

Major allocation of

resources to a product line in w

hich problems arise

Ross &

Staw

, 1986

The tangible and abstract

Impact of the

contemporaneous

Statistical casualties

Lowenstein et al.,

1996

Time delay traps

Imm

ediate gratification Failure to m

ake hard judgm

ent calls K

raakman, 1984

Loss aversion D

etest losses more

than enjoy gains, to protect endow

ment

Fraudulent concealment;

cover up

Self-serving bias • C

onsidered most im

portant by author

• Bazerm

an et al (2002) observe that ethics taught in the traditional m

anner will not reduce this bias in the w

orkplace

• Executives of E

nron, Arthur A

ndersen, WorldC

om exam

ples

• Confirm

ation bias: search for supporting information, ignore

contradictory evidence

• Belief persistence: holding on to discredited beliefs

• Causal attribution theory: tendency to take too m

uch credit for successes, and too little responsibility for failures

Framing

• Overriding lesson of heuristics and biases literature: in decision

making, context m

atters

• Self-serving bias m

ay lead people to frame decisions in such a w

ay as to lead to untow

ard conclusions

• Exam

ples: • attorneys keeping score of w

ins and losses, rather than the fulfilling the m

ission of doing justice • overem

phasis on shareholder value maxim

ization by CE

Os that

downplays the im

portance of ethics

Enron | A story of inter-institutional, compounded biases

Self-serving bias


Self-serving bias

Arthur A

ndersen

Investors

Enron executives

Enron em

ployees


Self-serving bias

Arthur A

ndersen

Investors

Enron executives

Enron em

ployees

Overoptim

ism

Overconfidence

Time delay traps

Loss aversion /endow

ment effect

Framing


Self-serving bias

Arthur A

ndersen

Investors

Enron executives

Enron em

ployees

Social proof


Obedience to authority

Process


Self-serving bias

Confirm

ation bias

Belief

persistence

Cognitive

dissonance

Arthur A

ndersen

Investors

Enron executives

Enron em

ployees

The tangible and the abstract


Self-serving bias

Confirm

ation bias

Belief

persistence

Cognitive

dissonance

Arthur A

ndersen

Investors

Enron executives

Enron em

ployees

Overoptim

ism

Overconfidence

The tangible and the abstract

Time delay traps

Loss aversion /endow

ment effect

Framing

Social proof


Obedience to authority

Process

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