600words
Judgment in Managerial Decision Making 8e Chapter 8 Fairness and Ethics in Decision Making
Copyright 2013 John Wiley & Sons
1
The Ultimatum Game Paradigm
You are traveling on an airplane, sitting in an aisle seat next to an eccentric-looking woman in the middle seat (Vivian). Next to her, in the window seat, is a rather a formal looking businessperson (Mark). About 30 minutes into the flight, Vivian interrupts you and Mark. She explains that she is quite wealthy, that she becomes bored on flights, and that she likes to pass the time by playing games. She then pulls 50 $100 bills out of her wallet and makes the following proposition. “I will give the two of you this $5,000 provided that you can agree on how to split the money. In splitting up the money, however, I will impose two rules. First, Mark must decide how the $5,000 is to be split between the two of you. Then, you [the reader] will decide whether to accept the split. If you do accept, then you and Mark will receive the portion of the $5,000 based on Mark’s allocation. If you do not accept the split, then you and Mark will each receive nothing.” Both you and Mark agree to play the game. Mark thinks for a moment and then says, “I propose that the $5,000 be split as follows: I get $4,900 and you get $100.” Now it is up to you: Will you agree to this split?
In what is known as the ultimatum game paradigm, people have an opportunity to split a pie of money between themselves and another player as they see fit. However, if the other player rejects the offer, no player wins anything.
If both players were perfectly rational and did not incorporate fairness considerations into their decisions, then those making offers would always offer $1 while keeping the rest and those receiving offers would always accept the offer since winning $1 is better than $0.
However, people often reject offers where they receive less than 20% of the pie because they perceive the offers to be unfair. Essentially, they derive more utility from denying the proposer’s allocation than they would have if the proposed allocation went through.
It also is clear that proposers account for fairness when making offers, as they typically offer a 50/50 split even though they could probably offer less and still make a profit.
There is also another version of the ultimatum game known as the dictator game. In this game, “dictators” can offer any sum of the pie of money that they like to another player and the other player must accept their offer regardless of how they feel.
Despite the fact that they have complete outcome control, dictators typically do not take all of the money available in the pie despite having the option to do so.
A real-world analogue to a dictator game is pay-what-you-want pricing. The concept behind pay-what-you-want pricing is that consumers can purchase a product for any product that they like, including $0.
Though people pay less for products under a pay-what-you-want format than under a more traditional format, many more people purchase products and in some cases, profits can be higher under a pay-what-you-want scheme than under a more traditional scheme.
People rarely pay nothing for products even though they have the opportunity, which suggests that fairness is an important consideration to them.
Evidence from the laboratory suggests that our persistent desire for fairness has a biological basis.
We tend to activate parts of the brain associated with negative emotion when considering unfair offers.
Cross-cultural studies suggest that fairness is an important consideration in every society that has been tested, though its strength may vary across cultures.
Even monkeys tend to respond to unfairness by refusing to work for rewards.
2
The Ultimatum Game Paradigm
If both players were perfectly rational and did not incorporate fairness considerations into their decisions, then those making offers would always offer $1 while keeping the rest and those receiving offers would always accept the offer since winning $1 is better than $0.
However, people often reject offers where they receive less than 20% of the pie because they perceive the offers to be unfair. Essentially, they derive more utility from denying the proposer’s allocation than they would have if the proposed allocation went through.
It also is clear that proposers account for fairness when making offers, as they typically offer a 50/50 split even though they could probably offer less and still make a profit.
In what is known as the ultimatum game paradigm, people have an opportunity to split a pie of money between themselves and another player as they see fit. However, if the other player rejects the offer, no player wins anything.
If both players were perfectly rational and did not incorporate fairness considerations into their decisions, then those making offers would always offer $1 while keeping the rest and those receiving offers would always accept the offer since winning $1 is better than $0.
However, people often reject offers where they receive less than 20% of the pie because they perceive the offers to be unfair. Essentially, they derive more utility from denying the proposer’s allocation than they would have if the proposed allocation went through.
It also is clear that proposers account for fairness when making offers, as they typically offer a 50/50 split even though they could probably offer less and still make a profit.
There is also another version of the ultimatum game known as the dictator game. In this game, “dictators” can offer any sum of the pie of money that they like to another player and the other player must accept their offer regardless of how they feel.
Despite the fact that they have complete outcome control, dictators typically do not take all of the money available in the pie despite having the option to do so.
A real-world analogue to a dictator game is pay-what-you-want pricing. The concept behind pay-what-you-want pricing is that consumers can purchase a product for any product that they like, including $0.
Though people pay less for products under a pay-what-you-want format than under a more traditional format, many more people purchase products and in some cases, profits can be higher under a pay-what-you-want scheme than under a more traditional scheme.
People rarely pay nothing for products even though they have the opportunity, which suggests that fairness is an important consideration to them.
Evidence from the laboratory suggests that our persistent desire for fairness has a biological basis.
We tend to activate parts of the brain associated with negative emotion when considering unfair offers.
Cross-cultural studies suggest that fairness is an important consideration in every society that has been tested, though its strength may vary across cultures.
Even monkeys tend to respond to unfairness by refusing to work for rewards.
3
The Ultimatum Game Paradigm
We forgo the benefits to punish
In what is known as the ultimatum game paradigm, people have an opportunity to split a pie of money between themselves and another player as they see fit. However, if the other player rejects the offer, no player wins anything.
If both players were perfectly rational and did not incorporate fairness considerations into their decisions, then those making offers would always offer $1 while keeping the rest and those receiving offers would always accept the offer since winning $1 is better than $0.
However, people often reject offers where they receive less than 20% of the pie because they perceive the offers to be unfair. Essentially, they derive more utility from denying the proposer’s allocation than they would have if the proposed allocation went through.
It also is clear that proposers account for fairness when making offers, as they typically offer a 50/50 split even though they could probably offer less and still make a profit.
There is also another version of the ultimatum game known as the dictator game. In this game, “dictators” can offer any sum of the pie of money that they like to another player and the other player must accept their offer regardless of how they feel.
Despite the fact that they have complete outcome control, dictators typically do not take all of the money available in the pie despite having the option to do so.
A real-world analogue to a dictator game is pay-what-you-want pricing. The concept behind pay-what-you-want pricing is that consumers can purchase a product for any product that they like, including $0.
Though people pay less for products under a pay-what-you-want format than under a more traditional format, many more people purchase products and in some cases, profits can be higher under a pay-what-you-want scheme than under a more traditional scheme.
People rarely pay nothing for products even though they have the opportunity, which suggests that fairness is an important consideration to them.
Evidence from the laboratory suggests that our persistent desire for fairness has a biological basis.
We tend to activate parts of the brain associated with negative emotion when considering unfair offers.
Cross-cultural studies suggest that fairness is an important consideration in every society that has been tested, though its strength may vary across cultures.
Even monkeys tend to respond to unfairness by refusing to work for rewards.
4
When We Resist “Unfair” Ultimatums
Dictator games
The same as previous game, but the responder has no right to reject or accept the offer
Despite the fact that they have complete outcome control, dictators typically do not take all of the money available in the pie despite having the option to do so.
There is also another version of the ultimatum game known as the dictator game. In this game, “dictators” can offer any sum of the pie of money that they like to another player and the other player must accept their offer regardless of how they feel.
Despite the fact that they have complete outcome control, dictators typically do not take all of the money available in the pie despite having the option to do so.
A real-world analogue to a dictator game is pay-what-you-want pricing. The concept behind pay-what-you-want pricing is that consumers can purchase a product for any product that they like, including $0.
Though people pay less for products under a pay-what-you-want format than under a more traditional format, many more people purchase products and in some cases, profits can be higher under a pay-what-you-want scheme than under a more traditional scheme.
People rarely pay nothing for products even though they have the opportunity, which suggests that fairness is an important consideration to them.
Evidence from the laboratory suggests that our persistent desire for fairness has a biological basis.
We tend to activate parts of the brain associated with negative emotion when considering unfair offers.
Cross-cultural studies suggest that fairness is an important consideration in every society that has been tested, though its strength may vary across cultures.
Even monkeys tend to respond to unfairness by refusing to work for rewards.
5
When We Resist “Unfair” Ultimatums
A real-world analogue to a dictator game is “pay-what-you-want” pricing.
The concept is that consumers can purchase a product for any price that they like, including $0.
Many people actually purchase these products and in some cases, profits can be higher under a pay-what-you-want scheme than under a more traditional scheme.
People rarely pay nothing for products even though they have the opportunity, which suggests that fairness is an important consideration to them.
There is also another version of the ultimatum game known as the dictator game. In this game, “dictators” can offer any sum of the pie of money that they like to another player and the other player must accept their offer regardless of how they feel.
Despite the fact that they have complete outcome control, dictators typically do not take all of the money available in the pie despite having the option to do so.
A real-world analogue to a dictator game is pay-what-you-want pricing. The concept behind pay-what-you-want pricing is that consumers can purchase a product for any product that they like, including $0.
Though people pay less for products under a pay-what-you-want format than under a more traditional format, many more people purchase products and in some cases, profits can be higher under a pay-what-you-want scheme than under a more traditional scheme.
People rarely pay nothing for products even though they have the opportunity, which suggests that fairness is an important consideration to them.
Evidence from the laboratory suggests that our persistent desire for fairness has a biological basis.
We tend to activate parts of the brain associated with negative emotion when considering unfair offers.
Cross-cultural studies suggest that fairness is an important consideration in every society that has been tested, though its strength may vary across cultures.
Even monkeys tend to respond to unfairness by refusing to work for rewards.
6
Persistent Desire For Fairness
Biological basis.
We tend to activate parts of the brain associated with negative emotion when considering unfair offers
Cross-cultural studies
fairness is an important consideration in every society that has been tested
Yet, its strength may vary across cultures
Even monkeys tend to respond to unfairness by refusing to work for rewards
monkeys rebelled when they were given smaller rewards than their fellow monkeys for performing the same task
Similar to when unequal payment undermines workers’ motivation
Evidence from the laboratory suggests that our persistent desire for fairness has a biological basis.
We tend to activate parts of the brain associated with negative emotion when considering unfair offers.
Cross-cultural studies suggest that fairness is an important consideration in every society that has been tested, though its strength may vary across cultures.
Even monkeys tend to respond to unfairness by refusing to work for rewards.
7
When We are Concerned about the Outcomes of Others
people are concerned about how their own rewards compare to the rewards of others.
Recognizing this, organizations create elaborate job grade systems to specify the compensation available to employees at each level within the organization.
Also, organizations strive to conceal salary data to avoid social comparisons and perceptions of unfairness
Major league baseball teams
a negative relationship between the size of pay differentials within a Major League Baseball team and how well that team performs
The smaller the gap between the highest-paid and the lowest-paid members, the better the team as a whole works together
Pay differentials play an important role in dictating organization-level outcomes.
Companies with more pay equity tend to produce better products than ones with pay inequity.
Major league baseball teams with more pay equity tend to perform better than those with pay inequity.
The gap between CEO pay and the pay of the average executive is negatively correlated with performance.
Pay differentials have important consequences because we use others’ outcomes as reference points to help us determine the acceptability of our own outcomes.
Though we tend to consider pay inequity to be unacceptable even when it means we would accept a lower salary that puts us on par with the salary of others, our actual choice behavior tends to favor outcomes that are more favorable to ourselves regardless of how we feel about the outcome.
Our perceptions of fairness are also dictated by whether we evaluate options jointly or separately.
When evaluating outcomes separately, we often rely on others’ outcomes as a reference point for what we should consider to be a fair outcome for ourselves.
However, when evaluating outcomes jointly, we often adopt a more rational mindset and favor the most favorable outcomes while ignoring the outcomes of others.
8
When We are Concerned about the Outcomes of Others
The gap between CEO pay and the pay of the average executive is negatively correlated with performance
Our perceptions of fairness are also dictated by whether we evaluate options jointly or separately.
When evaluating outcomes separately, we often rely on others’ outcomes as a reference point for what we should consider to be a fair outcome for ourselves.
However, when evaluating outcomes jointly, we often adopt a more rational mindset and favor the most favorable outcomes while ignoring the outcomes of others.
Pay differentials play an important role in dictating organization-level outcomes.
Companies with more pay equity tend to produce better products than ones with pay inequity.
Major league baseball teams with more pay equity tend to perform better than those with pay inequity.
The gap between CEO pay and the pay of the average executive is negatively correlated with performance.
Pay differentials have important consequences because we use others’ outcomes as reference points to help us determine the acceptability of our own outcomes.
Though we tend to consider pay inequity to be unacceptable even when it means we would accept a lower salary that puts us on par with the salary of others, our actual choice behavior tends to favor outcomes that are more favorable to ourselves regardless of how we feel about the outcome.
Our perceptions of fairness are also dictated by whether we evaluate options jointly or separately.
When evaluating outcomes separately, we often rely on others’ outcomes as a reference point for what we should consider to be a fair outcome for ourselves.
However, when evaluating outcomes jointly, we often adopt a more rational mindset and favor the most favorable outcomes while ignoring the outcomes of others.
9
When We are Concerned about the Outcomes of Others
Cross industry differences (oil or banking is better than publishing)
First, there is an observed correlation between high-profit industries and high wages. Second, if one job within an industry is highly paid, other jobs in that industry also tend to be highly paid
people make comparisons within their firm and to other firms in their industry rather than across industries
More options and fairness
when multiple options were available, participants were able to compare what they would receive across the multiple experiments
in this scenario the outcomes of others became less important
Pay differentials play an important role in dictating organization-level outcomes.
Companies with more pay equity tend to produce better products than ones with pay inequity.
Major league baseball teams with more pay equity tend to perform better than those with pay inequity.
The gap between CEO pay and the pay of the average executive is negatively correlated with performance.
Pay differentials have important consequences because we use others’ outcomes as reference points to help us determine the acceptability of our own outcomes.
Though we tend to consider pay inequity to be unacceptable even when it means we would accept a lower salary that puts us on par with the salary of others, our actual choice behavior tends to favor outcomes that are more favorable to ourselves regardless of how we feel about the outcome.
Our perceptions of fairness are also dictated by whether we evaluate options jointly or separately.
When evaluating outcomes separately, we often rely on others’ outcomes as a reference point for what we should consider to be a fair outcome for ourselves.
However, when evaluating outcomes jointly, we often adopt a more rational mindset and favor the most favorable outcomes while ignoring the outcomes of others.
10
Perverse Consequences of Equality Norms
You visit a car dealer and go on a test drive. You return to the salesperson’s cubicle in the showroom, ready to do a deal. The car has a list price of $18,000. After a short discussion, you offer $15,500. The salesperson counters with $17,600, you counter with $16,000, he counters with $17,200, you counter with $16,400, and he reduces his price to $16,800. You act as if you will not make another move and threaten to visit another dealership. The salesperson then says earnestly, “You look like a nice person, and I can see that you really like the car. My main concern is that you get the car that you want. I assume that you are a reasonable person, and I want to be reasonable. How about if we split the difference—$16,600?”
Take a moment to read the following scenario.
Think about what you would do here.
Most of us would quickly accept the offer because the salesperson has split the difference.
This seems to be fair to most people, but it is merely an artifact of the situational framing and the prior offers that were made.
In the absence of information about the prior offers made, people may not perceive an price of $16,600 to be fair. This reflects the arbitrariness of fairness perceptions.
11
Perverse Consequences of Equality Norms
Most of us would quickly accept the offer because the salesperson has split the difference.
This seems to be fair to most people, but it is merely an artifact of the situational framing and the prior offers that were made.
In the absence of information about the prior offers made, people may not perceive a price of $16,600 to be fair. This reflects the arbitrariness of fairness perceptions.
Norms of equality can cause us to accept “fair” situations too prematurely
Take a moment to read the following scenario.
Think about what you would do here.
Most of us would quickly accept the offer because the salesperson has split the difference.
This seems to be fair to most people, but it is merely an artifact of the situational framing and the prior offers that were made.
In the absence of information about the prior offers made, people may not perceive an price of $16,600 to be fair. This reflects the arbitrariness of fairness perceptions.
12
Why do Fairness Judgments Matter?
People punish unfair behaviors
Third parties in dictator games, who only observe
Satisfaction from punishing unfair behavior
found most observers (more than 55%) to accept a $1 fee for a $3 penalty on the dictator
Accounting for others’ fairness perceptions
Fairness is so important that people go out of their way to punish unfair behaviors.
In modified dictator games, people are willing to incur a loss from their own earnings in order to punish unfair dictators.
Punishment of cheaters are predicted by activity in a region of the brain associated with satisfaction, so it appears that people derive utility from punishing unfair behaviors, even when it is associated with an economic loss.
Though it is not necessarily clear whether punishing others is in an individual’s best interest, it is clear that decision-makers would be well-advised to consider the perceptions of others before making decisions involving fairness considerations. Even though fair allocations to others may not be in an individual’s best short-term financial interest, long-term interests may be best served by making decisions that will be perceived favorably by others.
13
Bounded Ethicality
Bounded ethicality is unethical behavior that occurs outside of our conscious awareness and contradicts one’s own ethical standards
Bounded ethicality comes in the following forms:
Overclaiming credit
In-group favoritism
Implicit attitudes
Indirectly unethical behavior
Pseudo-sacred values
Conflicts of interest
Bounded ethicality is unethical behavior that occurs outside of our conscious awareness. There are seven forms of bounded ethicality that we will discuss:
In-group favoritism, or the tendency to favor in-group members over out-group members.
Implicit attitudes, or unconscious attitudes that we hold about others.
Indirectly unethical behavior, or behavior that harms others indirectly.
Values that we consider to be sacred.
Conflicts of interest that impact our behavior despite our best efforts to not be biased.
14
Overclaiming Credit
In a study, researchers asked married couples to estimate the percentage of household activities, such as washing the dishes or taking out the trash, they each personally performed
the per-couple average was close to 140 percent
Even honest people tend to believe they contributed more to an enterprise than they actually did
Joint ventures
parties are often skeptical that the other side is doing its share
When we factor in the tendency of each side to overclaim credit for its own contribution, it becomes apparent that each side will feel entitled to reduce its contribution
One thing that we commonly do is overclaim the amount of credit that we deserve on a task performed with others.
This is often reflected in adding estimates of the percentage of tasks that people say they are responsible for. Often, these tasks sum up to a total greater than 100%, which is greater than the maximum amount of responsibility and greater than 50%, which would indicate an even split of tasks.
People overestimate the percentage of household chores that they are responsible for relative to their spouse.
In joint ventures, each party is reluctant to contribute its best resources into a project unless they are sure that the other party will also be fully invested. Combined with the tendency to overclaim credit, each party often feels justified in reducing its contribution to the joint venture, which breeds a mutual perception that the other party is unfair.
One way to reduce (but not eliminate) the tendency to overclaim credit is to directly ask people to consider both their own contributions and the contributions of others.
15
Overclaiming Credit
Reducing overclaiming by considering others
One way to reduce (but not eliminate) the tendency to overclaim credit is to directly ask people to consider both their own contributions and the contributions of others
One thing that we commonly do is overclaim the amount of credit that we deserve on a task performed with others.
This is often reflected in adding estimates of the percentage of tasks that people say they are responsible for. Often, these tasks sum up to a total greater than 100%, which is greater than the maximum amount of responsibility and greater than 50%, which would indicate an even split of tasks.
People overestimate the percentage of household chores that they are responsible for relative to their spouse.
In joint ventures, each party is reluctant to contribute its best resources into a project unless they are sure that the other party will also be fully invested. Combined with the tendency to overclaim credit, each party often feels justified in reducing its contribution to the joint venture, which breeds a mutual perception that the other party is unfair.
One way to reduce (but not eliminate) the tendency to overclaim credit is to directly ask people to consider both their own contributions and the contributions of others.
16