The FINANCIAL -- Convicted stockbroker Bernie Madoff knew exactly what he was doing when he stole billions from clients, yet the financial advisor didn’t pull off the biggest Ponzi scheme in the United States by himself.
He had the help of unwitting accomplices—hundreds of investors who trusted his fraudulent fund, even though many suspected something was strange, since the low-risk fund had defied reality by dramatically outperforming the stock market several years in a row, according to HBS.
“We were all aware of this hedge fund that had had great returns for 20 years,” recalled one trader in an April 2009 Fortune article. “We knew it was statistically impossible. As a collective, we always kind of wondered: How the hell does he do it? Every person was curious. But that’s where it stopped. You’d stop yourself from wondering. You’d say, ‘There couldn’t be anything bad.’”
Harvard Business School’s Max H. Bazerman, the Jesse Isidor Straus Professor of Business Administration, argues that good people with strong ethical values, like these traders, can behave in shady ways without consciously realizing they are doing so.
“I’ll bet there were dozens if not hundreds of people who thought there was something quirky with Madoff, but [they] didn’t bother to find out what was going on,” Bazerman says. “If we’re busy and life is good and we’re making money ourselves, we act like we don’t notice something is wrong—but at the same time we’re exposing our clients to this enormous risk.”
Negotiators deceive without realizing it
Bazerman draws on the psychological study of ethical decision-making and applies it to negotiations in his recent Academy of Management Perspectives article, Bounded Ethicality and Ethical Fading in Negotiations: Understanding Unintended Unethical Behavior, co-written by McKenzie Rees, of Southern Methodist University, and Ann E. Tenbrunsel, of the University of Notre Dame.
With profit and greed driving the desire to deceive, it’s not surprising that negotiators often act unethically. But it’s too simplistic to think people always enter a negotiation looking to dupe the other side.
Sometimes negotiators stretch the truth unintentionally, falling prey to what Bazerman and his colleagues call “bounded ethicality” by engaging in unethical behavior that contradicts their values without knowing it.
Why does this happen? In the heat of negotiations, “ethical fading” comes into play, and people are unable to see the ethical implications of their actions because their desire to win gets in the way. The end result is deception, according to HBS.
In business, with dollars at stake, many people will interpret situations in ways that naturally favor them. Take Bazerman’s former dentist, who always seemed too quick to drill. “He was overtreating my mouth, and it didn’t make sense,” he says.
"IT’S ONLY IN THE MIDST OF THE NEGOTIATION ITSELF THAT ETHICAL BLIND SPOTS APPEAR"
In service professions, he explains, people often have conflicts of interest. For instance, a surgeon may believe that surgery is the proper course of action, but her perception is biased: She has an incentive and makes money off the decision to operate. Another surgeon might just as easily come to the conclusion that if it’s not bothering you, don’t operate. “Lawyers are affected by how long a case takes to settle,” he adds. “Auditing firms screw up, and one scandal after another occurs, because they don’t want to upset their clients by noticing and telling them their books stink because they might lose their business.”
Deception occurs at the negotiation table
According to Bazerman, negotiators go through three phases, noting that it’s only in the midst of the negotiation itself that ethical blind spots appear.
Preparing for the negotiation: During this phase, negotiators are driven mostly by the idealistic “should self”— focusing on principles, values, and how they desire to behave—and predict that they will act ethically at the bargaining table.
Participating in the negotiation: During this action phase when negotiators are at the table, making decisions about offers, agreements, and concessions, the “want self” becomes dominant, and negotiators are more focused on “what makes sense for me at this moment.” It’s at this self-interested point when ethics are most likely to fall by the wayside.
Recalling what happened after the negotiation: During this last phase as they reflect on the give-and-take, a negotiator's should self reemerges, and they often look back on their actions as being more in line with their values than they actually were.
In recollecting how the talks went after the fact, Bazerman says negotiators often fail to see things from the other side’s perspective. Take the example of a negotiation to purchase a house. The seller tells the buyer that the home is generally in good condition, although the seller knows the furnace conks out with some regularity. A month after the buyer takes ownership, the furnace blows. The seller may still stand by the statement that the house was OK. The buyer, however, may feel the seller was covering up a big problem, according to HBS.
“I think most of us have a self-image that we’re pretty ethical people, yet most of us have done bad things in the context of a negotiation,” Bazerman says. “People may avoid telling a direct lie, but they’re willing to say things that are ambiguous that hide what perfect ethicality looks like.”
Certain triggers can make negotiators vulnerable to acting unethically, he adds:
When high-stakes incentives like big dollar amounts are involved, negotiators are more likely to distort the information they provide.
If negotiators face the prospect of suffering a loss, they are more inclined to minimize that loss by stretching the truth.
When negotiators have a lot of uncertainty and lack information, they are more likely to engage in deceptive practices.
If negotiators think their counterparts have treated them unfairly, they are more likely to lie during a negotiation to balance the scales of fairness.
How companies can promote ethics
Negotiators can keep their values intact and prevent deception from creeping into talks by using several techniques or processes, Bazerman says.
To promote ethics at the bargaining table, negotiators should be encouraged to slow down and deliberate on important decisions. Masking the gender of applicants for tech jobs before deciding whether they should be interviewed can remove bias from the process. And when selecting employees for a task, managers should compare two or more employees at once, rather than one at a time. (Bazerman’s earlier research with Iris Bohnet and Alexandra van Geen found that people are less sexist when assessing multiple people.)
Even changing where on the page people sign contracts can encourage honesty. When people sign a form before filling it out, indicating they will tell the truth, they are less likely to lie than when they sign it at the end. “We’ve had the signature line in the wrong place for centuries,” Bazerman says.
Negotiators also should realize that language matters. Social psychologist Lee Ross’s research has found that the way the talks are framed affects how cutthroat they can become. Calling a game “Wall Street” brings out less generosity than calling it “Community,” even though the payoffs are identical. When negotiators use words like “ultimatum,” “opponent,” and “winning,” Bazerman says they can unknowingly set the talks up for deception, according to HBS.
Bazerman hopes that by making business negotiators more aware of when they are susceptible to ignoring their own values, they will pay closer attention to their behavior.
“We need to look at how we can change the business world so that people will deliberate in a more ethical way,” he says. “There’s a lot we can do to get people to be more thoughtful and reflective.”
Name the best fund
During a presentation, Bazerman will show a Standard and Poor’s chart tracking the activity of four funds over a nine-year period. He asks audience members which one they would choose to invest in. About 75 percent flock to a fund called Fortitude, with exceedingly high returns that far outpace the other funds.