Wednesday, March 7, 2012

One piece of chocolate now or two pieces of chocolate later?
In the aftermath of the recent economic crisis, much has been debated about its potential causes and the lessons learned. However, it seems to me that neither from the causes nor the lessons as a starting point, a significant and generally accepted foundation emerged that could now lead the way out of this precarious situation and prevent us from future economic failure or misbehavior. Except for the obvious and the unhelpful, such post-fact evaluations leave us still wondering when the next crisis is going to happen and what it might look like.
In a recently published paper, Thomas Donaldson (2012) illuminates potential causes for the crisis from the angle of business ethics and leadership. In doing so, he also sheds a valuable light on some of the lessons that must be learned. Donaldson puts forward an argument for the ethics story behind the crisis and submits that among its causes can also be found three ethical roots: ‘Paying the peril’, ‘The normalization of questionable behavior’ and ‘Tech-shock’.
Without going to much into detail on these ethical roots that indeed go beyond the obvious and unhelpful, I came across a central aspect that is common to all of them to a certain extent – the dilemma between short-term profit and long-term value. Whether it is on an individual level, where an investment banker gambles on a ten percent annual risk of disaster in order to reap a big bonus; or on an institutional level, where banks pay salaries and bonuses to managers for actions today, even though the firm’s rewards or penalties for those actions happen tomorrow; or on an industry level, where practices become accepted that enrich the short term only to impoverish the long term, the dilemma is ever-present.
Thinking of these matters, I was reminded of an insightful TV report about the human ability to make time-dependent decisions. A simple experimental design was set up; children at the age of about 4 years were given a piece of chocolate and told that if they won’t eat it during the next 5 minutes, they get another one. The outcomes were equally amusing as astounding: except for some rebels for which the single piece seemed too tempting, the majority either managed to run down the clock without touching the chocolate (in which case they usually tried to distract themselves) or they tried to cheat, i.e., tasting the chocolate and then putting it back before the investigator returns in the hope of getting away with it. Apparently, the ability to trade individual short-term satisfaction for a future bonanza, which is by the way also found among certain animals, starts to evolve at around 3 to 4 years of age – one of the behavioral scientists explained.
Although, this straightforward comparison might tempt us to argue that the bad ethics, which led to the recent financial crisis, is occasionally part of our nature, it also and more significantly emphasizes the importance of setting appropriate incentive structures to encourage good ethics and placing more weight on collective rather than individual value. Because the most important question that remains is at what age the ability to trade individual short-term profit against future collective prosperity starts to evolve?
Marc Moser

Donaldson, T. (2012): Three Ethical Roots of the Economic Crisis. Journal of Business Ethics, vol. 106, no. 1, pp. 5-8.

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