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.
“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.
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.
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.
1. 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.
2. 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.
3. 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.
“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:
[This article was provided with permission from Harvard Business School Working Knowledge.]