Leliveld, M.C.
Citation
Leliveld, M. C. (2009, January 29). Ethics in economic decision-making.
Kurt Lewin Institute Dissertation Series. Kurt Lewin Instituut, Amsterdam. Retrieved from https://hdl.handle.net/1887/13442
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Chapter 1
Ethics in Economic Decision-Making:
An Introduction
We make thousands of decisions in the course of a lifetime. Many of these decisions not only affect our own outcomes, but also other people’s outcomes. As “all normal people possess a sense of morality” (Krebs, 2008, p.149), we realize that we should pay attention to the consequences of our decisions for others. But what exactly are the roles ethics and morality play in how we come to make our decisions? When do we further our self-interest, and when do we adhere to ethical standards? When is certain behavior perceived as ethical, and when is it not? Moreover, how do we react when we see that ethical standards are being violated? The aim of this dissertation is to shed more light on these questions. More specifically, this dissertation will focus on the impact of ethics on self-interest and fairness in economic decision-making (Chapter 2 and Chapter 3), and on how we react when ethical standards are violated (Chapter 4).
In order to answer these questions, we need to know how ethics can be defined. According to the Cambridge dictionary, ethics is “a system of accepted beliefs which control behaviour, especially such a system based on morals”.
Hence, ethics refers to standards of what people believe is morally the right or wrong thing to do. Or, put differently, standards of what people believe is fair or just behavior. “The sense of justice is largely grounded in basic ethical assumptions as to how other human beings should be treated” (p.216, Folger, Cropanzano, & Goldman, 2005). In sum, the concepts of ethics, morality, justice, and fairness are closely connected.
Ethics in Economic Decision-Making
In this dissertation, I specifically focus on the role of ethics in economic decision-making. How do people make decisions about money? How do they divide scarce resources? And what is the role of ethics in this? What people perceive to be ethical, can be determined by answering the question ‘How should we behave?’ (e.g., Folger & Cropanzano, 1998; March, 1994; Messick, 1999). There are several answers to this question, which reflect the rules of
conduct in coming to morally just decisions in these distributive settings. Most commonly known rules are equality, equity, and need (Deutsch, 1975).
Whereas equity is based on the inputs to allocate outputs, and need is based on the person’s need to own the property, equality is the simplest division rule.
The equality rule implies that all people end up with the same outcomes, and is often used in allocating resources, because of its simplicity, justifiability, and effectiveness (Messick, 1993). More specifically, in many situations, it is easy to determine how much all people should get when everyone has to end up with an equal share. Moreover, this equal division is easy to justify to others (e.g., De Kwaadsteniet, Van Dijk, Wit, De Cremer, & De Rooij, 2007). The equal division rule is therefore often accepted by everyone involved, and is an effective way to sort allocation problems. Consequently, the equal division rule can be regarded as an ethical standard in distributive settings.
Other ethical rules do not tell us directly how we should divide resources, as the equal division rule does, but merely tell us how we should treat other people in general. One of these rules, also known as the Golden Rule or the ethic of reciprocity, is “do to others, as you would have them do to you”.
This philosophy can be traced back to ancient Greece (e.g., in Epictatus’
“Encheiridion”), and is a widely spread rule, known in many religions (e.g., in Christianity: Matthew 7:12; in Islam: Forty Hadith of an-Nawawi 13; in Judaism: Leviticus 19.18). This Golden Rule, when related to the omission bias1, is at the basis of the ‘do-no-harm’ principle (Baron, 1993; 1995; 1996; Van Beest, Van Dijk, De Dreu, & Wilke, 2005; Van Beest, Wilke, & Van Dijk, 2003), which states that people are reluctant to harm one party to benefit another.
This principle was empirically shown by a study of Baron (1993; 1995) in which participants were placed in the role of a benevolent dictator on a small island.
This island had two groups of constituents: wheat growers and bean growers.
Participants had to decide about an offer of a business partner which would affect the income of both the wheat growers and the bean growers. Baron (1993; 1995) showed that participants were reluctant to accept an offer which would benefit one group but harm the other.
Despite the fact that these ethical standards exist, people do not always adhere to these standards when making economic decisions. On the contrary, we often observe inequality, and on many occasions people are harmed at the expense of others. Tenbrunsel (1998) argues that “negotiations are asserted to be breeding grounds for unethical behavior” (p.330). Indeed, negotiations are typical situations in which we can observe unethical behavior, because people
often face an ethical dilemma (Aquino, 1998; Tenbrunsel & Messick, 2001). On the one hand, one can behave ethically, and follow the moral norms. On the other hand, one can behave unethically, by serving one’s own interests.
Negotiations research indeed showed that people are motivated by their self- interest, and by a concern for others (e.g., De Dreu, Beersma, Steinel, & van Kleef, 2007; De Dreu & Steinel, 2006; Handgraaf, Van Dijk, & De Cremer, 2003; Van Beest, & Van Dijk, 2007; Van Dijk & Tenbrunsel, 2005). This interplay between fairness and self-interest is therefore crucial when one wants to understand ethical decision-making, making negotiations a good setting to study (un)ethical behavior.
There are many ways to further one’s own interests in negotiations (e.g., Anton, 1990; Aquino, 1998; Lewicki & Stark, 1996). For example, people can withhold information or even deceive the other party to manipulate the own outcome of the negotiation to their advantage. Moreover, negotiators may have more power than the other party. People can use this power to increase their own outcomes.
To conclude, people have ethical standards regarding how they should behave in distributive settings and how they should treat others. However, people do not always adhere to these standards. This dissertation aims at providing a more comprehensive picture on when and why people behave ethically, and how they respond to people who do not maintain these standards.
To be able to tap into the underlying motives, e.g., self-interest and fairness, of ethical decision-making, I turned to the literature on economic games and game theory. This literature provides several economic decision-making paradigms with clear and simple structures. This makes it possible to disentangle the motivations of fairness and self-interest. In the following part of this introduction, I will provide a short overview of the relevant literature on economic games to show how this literature can help us to study ethics in economic decision-making.
Economic games
The Ultimatum Bargaining Game (UBG) (Güth, Schmittberger, &
Schwarze, 1982) captures the interplay of fairness and self-interest in bargaining situations, and is therefore of particular importance when studying ethics in economic decision-making. The UBG reflects the final stage of a negotiation in which one party makes a take-it-or-leave-it offer. In the UBG, there are two players, the allocator and the recipient. The allocator makes an
offer on how to divide a given resource. When the recipient accepts this offer, the resource is divided according to the offer. When the recipient rejects the offer, both players receive nothing. With its simple structure, it is very clear how players should behave if they were only motivated by self-interest. Rational recipients would accept every offer above zero because accepting these offers is better than the alternative, i.e., rejecting the offer and receiving a zero outcome. Rational allocators, consequently, make the lowest possible offer above zero to the recipient. However, early research on the UBG behavior showed that most allocators made a 50-50 offer, and that recipients rejected offers consisting of less than 30% of the resource (e.g., Güth, Ockenfels &
Tietz, 1992; see also Camerer & Fehr, 2006; Handgraaf, et al., 2003). These first results suggested that it was fairness that motivated bargaining behavior.
Later research showed that people do not always behave as fairly as it seemed at first glance (e.g., Fellner & Güth, 2003; Kagel, Kim, & Moser, 1996;
Suleiman, 1996; Van Dijk, De Cremer, & Handgraaf, 2004; Van Dijk & Vermunt, 2000). For example, in a study by Kagel et al. (1996), the bargained property consisted of chips, which differed in their monetary value. Allocators would receive twice as much for each chip as recipients would. When both the allocator and recipient knew of this value difference (i.e., in the symmetric information condition), allocators compensated this difference, and made offers resulting in an equal monetary outcome. However, when only allocators knew that their chips were worth more, whereas the recipient only knew the value of his/her own chips (i.e., in the asymmetric information condition), allocators did not compensate. Instead, the modal offer was a - seemingly fair - equal split of the chips, i.e., allocators made an offer which on acceptance would lead to a payoff twice as high for the allocator as for the recipient. Moreover, Handgraaf, Van Dijk, Wilke, Vermunt, and De Dreu (2008, Experiment 2) showed that when allocators got the possibility to communicate about the value of their chips with the recipient, they deceived the recipient by telling them that their chips were equally valuable whereas, in fact, they were not. In sum, this line of research showed that people are not always motivated by true fairness, but also by strategic fairness (i.e., they merely want to appear fair).
Research on the role of power in the UBG also showed that people are not always as fair as they seemed to be (e.g., Suleiman, 1996; Fellner & Güth, 2003). In the UBG, power is often defined as the allocator’s dependency upon the recipient’s behavior. In the traditional UBG, the allocator is highly dependent, because the consequences of a rejection by the recipient are
severe, i.e., a zero outcome. Fellner and Güth (2003) designed an UBG with parameter , which alters the consequences of rejection, and therefore the dependency upon rejection. When recipients accept, the property will be divided according to the offer, similar to the traditional UBG. However, when the offer is rejected, recipients will receive their payoff suggested by the allocator multiplied by 1 - while allocators will receive their payoff multiplied by . The consequences of rejection are thus different for allocators and recipients. When
is for instance 0.1, a rejection will have more negative consequences for allocators than for recipients. In contrast, when is 0.9, a rejection will have more negative consequences for recipients than for allocators. Therefore, when
is low, the allocator is highly dependent on the recipient’s reaction, but when
is high, the allocator is much less dependent. Fellner and Güth (2003) found that low dependency led to lower offers than high dependency. In other words, similar to the research on information (a)symmetry, this line of research on power and dependency showed that people are motivated by strategic fairness.
In sum, the UBG provides a well-suited paradigm to study motivated bargaining behavior (e.g., Handgraaf et al., 2003; Pillutla & Murnighan, 2003;
Van Dijk, Leliveld, & Van Beest, 2008; Van Dijk & Tenbrunsel, 2005). Moreover, it provides a paradigm to study behaviors that increase own outcomes at the expense of others, like deception and (ab)use of power. From previous research on the UBG, it seems as if people are not motivated by true fairness, but by strategic fairness. More specifically, allocators further their self-interest when they have the possibility to do so (either by deception or by having less fear of rejection), and thus violate the equal division rule. This dissertation extends these results, by showing that people in bargaining situations are not only motivated by strategic motivations, like self-interest and fear of rejection, but also by motivations to adhere to ethical standards.
Ethical standards in the UBG
Results of UBG studies seemingly suggest that people do not adhere to ethical standards, like an equal division of the resource or the do-no-harm principle. However, within the UBG, there is little room for harming the other person to benefit yourself. When an allocator makes a low offer to the recipient, the recipient, upon acceptance, still has more resources than before the recipient started the bargaining. That is, allocators and recipients start the bargaining without any endowments, and can gain from successful bargaining.
It can be argued that people do not actually harm recipients by making low offers, and thus also adhere to the do-no-harm principle when doing so.
However, in real life, there are many situations in which we can harm another person to benefit ourselves. For example, when bargaining over a certain property, you can have the idea that you are taking property away from the other party. Or you can let someone else pay more than you do yourself.
More specifically, people might perceive the property to be initially owned by one of the parties. This creates situations in which people are either giving to another person, or taking from another person. Taking something from someone else might be considered as more harmful than giving something.
Moreover, we do not only make decisions about how to allocate positive outcomes, like gains or bonuses, but also about how to allocate negative outcomes, like losses or budget cuts. When people try to let the other person pay more than they pay themselves, people might evaluate this behavior as more harmful than when people try to let the other person gain less than they gain themselves. Investigating these situations gives a better understanding of when and why people use ethical standards in distributive settings. The influence of initial ownership of the bargained property, as well as of outcome valence in bargaining is as yet unknown. This dissertation addresses these issues.
In Chapter 2, the influence of initial ownership on bargaining behavior is studied by introducing the giving, splitting, and taking UBG. In the giving UBG, allocators initially own the resource, and have to make a decision about how much to give to the recipient. In the taking UBG, recipients initially own the resource, and allocators have to make a decision on how much to take from the recipient. Over the course of three experiments, this chapter shows that allocators in the giving UBG make lower offers to the recipient than allocators in the taking UBG. Moreover, by manipulating information and dependency upon the recipient, this chapter shows that the initial ownership effect can be explained by feelings of entitlement, rather than strategic motivations, like self- interest and fairness.
In Chapter 3, the investigation of the role of ethical standards in bargaining continues by studying the effect of outcome valence in bargaining.
To do so, I developed the negative valence UBG, in which people have to bargain over a loss. In three experiments, I systematically study the effect of outcome valence on fairness accessibility, norms, and behavior. Results on all three aspects show strong evidence for the hypothesis that fairness becomes
more important and self-interest becomes less important in negative valence bargaining.
Reactions to violations of ethical standards
The aim of this dissertation is not only to study when people adhere to ethical standards (as studied in Chapter 2 and 3), but also to shed more light on how people react when these standards are violated. The rejection behavior of recipients in the UBG can be used to reveal to what extent people believe the allocator has violated an ethical standard. That is, when recipients strongly believe in an equal division of the resource, they might reject an offer consisting of less than the equal share, in order to punish the allocator for violating justice (cf., Fehr & Fischbacher, 2003). However, these rejections might also be motivated by revenge and retaliation (Fehr & Fischbacher, 2004; Stouten, De Cremer, & Van Dijk, 2006). In other words, people may reject offers not only out of ethical or moral motivations, but also out of self-interest.
Again, it is helpful to consider the literature on economic games, which provides a paradigm in which retaliation and revenge cannot play a role. Fehr and Fischbacher (2004) introduced the Third Party Punishment Game, in which three persons – Person A, B, and C – are involved. Person A is endowed with 100 points, B with 0 points, and C with 50 points, each point representing a certain monetary value. In the first stage, Person A and B play a so-called Dictator Game. Player A decides how many points to give to Person B. Person B has no influence on this decision, and is therefore powerless. In the second stage, Person C can transfer deduction points to Person A after observing A’s offer to B. Each deduction point transferred to A reduces the income of Person A by three points. Note that Person C is not involved in the allocation of points between person A and B, and that revenge cannot be the explanation of punishment behavior. Nevertheless, Fehr and Fischbacher (2004) found that third parties punished Person A, with increasing transfers to Person A (i.e., punishment) when inequality of A’s offer, benefiting Person A over Person B, increased.
Note, however, that our justice system provides two main types of behavioral reactions in situations of injustice: To punish the person causing the injustice, and to compensate the person suffering the injustice (Darley &
Pittman, 2003). Most of the research on reactions to injustice focused on punishment, as did the study of Fehr and Fischbacher (2004). Less attention has been given to compensation of the person suffering injustice. To address
this gap in the current literature, and to get a better understanding of how and why people use punishment and compensation to restore justice, I introduce the altruistic compensation game in Chapter 4. In this game, people can transfer compensation points to Person B at their own expense, instead of transferring punishment points to Person A (cf., Fehr & Fischbacher, 2004).
Chapter 4 shows that people are willing to costly compensate the person suffering injustice, even when they have the possibility to punish the person causing the injustice. Moreover, by turning to the literature on empathic concern to get a better understanding of why people compensate and punish, Chapter 4 shows that empathic concern moderates punishment and compensation behavior.
Overview
This dissertation aims to shed more light on ethics in economic decision-making. To do so, I use both insights from ethical decision-making literature as well as insights from the literature on economic games. More specifically, this dissertation focuses on the adherence to do-no-harm principle (Baron, 1995, 1996; Van Beest, et al., 2003; 2005) and the equal division rule (e.g., Messick, 1995), and on reactions to violations of these rules. Chapter 2 presents a series of experiments in which the influence of initial ownership on bargaining behavior and motives is investigated. In Chapter 3, the influence of outcome valence on three important aspects is investigated, i.e., fairness accessibility, norms, and behavior. Finally, Chapter 4 extends the literature on justice restoration by studying altruistic compensation behavior, and directly compares it to the willingness to punish.2
