Classified - Confidential FAIRNESS AND ETHICS IN DECISION MAKING The document discusses fairness and ethics in decision making. It addresses how individuals perceive fairness, how framing can influence fairness judgements, and bounded ethicality. Bounded ethicality refers to unethical behavior that occurs unconsciously through biases like overclaiming credit, in-group favoritism, implicit attitudes, indirect unethical actions, prioritizing pseudo-sacred values, and succumbing to conflicts of interest. The document provides examples and studies on each of these biases and their effects on decision making.

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FAIRNESS AND ETHICS IN DECISION MAKING
DECISION MAKING
DR. MANAL ELKORDY
AMR SAMY ELSHEIKH
AMR SHERIF ARAFA

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• Issues of fairness and ethics are essential to a complete
understanding of decision making.
• The first half of this chapter focuses on how individuals
perceive the fairness of the actions of others. As we will
discuss, people care passionately about fairness despite the
fact that economic theory dismisses concerns to our
decisions.
• The second half of the chapter focuses on ethics and
considers the ways in which our ethical judgments can be
biased, usually in self-serving ways, and often without our
awareness.
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INTRODUCTION
FAIRNESS & ETHICS IN DECISION MAKING

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A hardware store has been selling snow shovels for $15. The morning after a large
snowstorm, the store raises the price to $20.
There is an increasing demand increase in demand brought about by a snowstorm.
- From an economic perspective, it is completely rational to increase shovel prices in response to the
snowstorm.
- Despite the rationality of raising prices, 82% of people view a price increase as unfair in this scenario.
• Many would not think it fair for a hardware store to raise the price of generators after a hurricane.
• However, the loss of future business from angry customers may cost you more!!
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CONSEQUENCES OF SUPPLY & DEMAND
SEEMS UNFAIR

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CONSEQUENCES OF SUPPLY & DEMAND
SEEMS UNFAIR

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• A wage cut was perceived as an unfair loss, while a nominal gain that does not cover inflation was more
acceptable. known in the economics literature as the “money illusion; makes Problem B seem fair, even
though it is essentially equivalent to the wage change in Problem A.
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FRAMING EFFECT TO THE FAIRNESS JUDGEMENT
Problem 1: A company is making a small profit. It is located in a community experiencing a recession with substantial
unemployment but no inflation. Many workers are anxious to work at the company. The company decides to decrease wages
and salaries 7 percent this year.
Problem 2: A company is making a small profit. It is located in a community experiencing a recession with substantial
unemployment and inflation of 12 percent. Many workers are anxious to work at the company. The company decides to increase
wages and salaries 5 percent this year.
only 22 percent of the participants thought the company’s behavior was unfair.
62% of respondents thought it was UNFAIR.

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A shortage has developed for a
popular model of automobile,
and customers must now wait
two months for delivery. A
dealer has been selling these
cars at list price. Now the dealer
prices this model at $200 above
list price.
A shortage has developed for a
popular model of automobile, and
customers must now wait two months
for delivery. A dealer has been selling
these cars at a discount of $200 below
list price. Now the dealer prices this
model at list price.
FRAMING EFFECT TO THE FAIRNESS JUDGEMENT
• When prices change, interpretations of fairness are clearly influenced by the framing effects

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The Ulimatums:
1- The Ultimatum Game.
The airplane offer: 4900 100$, 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.
2- Dictator Game.
3- Capuchin Monkeys experiment.
WHEN WE RESIST “UNFAIR” ULTIMATUMS

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WHEN WE ARE CONCERNED ABOUT 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. (Oil & Gas companies)
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.

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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?”
PERVERSE CONSEQUENCES OF EQUALITY
NORMS

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18,000
17,600
17,200
16,800
FRAMING EFFECT TO THE FAIRNESS JUDGEMENT
15,500
16,000
16,400
????

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Fehr and Fischbacher (2004) had
participants in their experiment play a
dictator game with a twist. In addition to
the dictator and the recipient, there was
also a third-party observer.
The observer could see what the dictator
provided the recipient and could decide
whether to punish the dictator or the
allocation
WHY DO FAIRNESS JUDGMENTS MATTER?

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Bounded ethicality is unethical behavior that occurs outside of our conscious
awareness.
Bounded ethicality comes into play when an executive makes a decision that not
only harms others but also is inconsistent with his or her conscious beliefs and
preferences.
There are six forms of bounded ethicality:
- Overclaiming credit
In-group favoritism
Implicit attitudes
Indirectly unethical behavior
Pseudo-sacred values
Conflicts of interest
BOUNDED ETHICALITY

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1) Overclaiming Credit:
Overestimating our contributions
• Spouses and household work.
• Joint ventures ending dissapointment.
• 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.
2) In-Group Favoritism:
• Favoring similar others.
1. Indirect discrimination (stereotyping).
2. Positive characteristics.
• Consequences
1. Loans
2. Legacy admissions
BOUNDED ETHICALITY CONT.

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3) Implicit Attitudes:
For instance, that when we meet someone, our minds automatically activate stereotypes
of the person’s race, sex, and age.
 We are more likely to respond to aggression after seeing a black face than after seeing a white face.
 The automatic activation of stereotypes tends to make whites uncomfortable in interracial interactionsThe IAT
The Implicit association test
• The IAT cannot reveal whether or not someone is racist, sexist, and so on. Rather,
it measures the strength of an individual’s implicit association between two pairs of
categories, such as White/Black and Good/Bad.
BOUNDED ETHICALITY CONT.

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IMPLICIT ASSOCIATION TEST “IAT”

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IMPLICIT ASSOCIATION TEST “IAT”

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Imagine that a major pharmaceutical company is the sole marketer of a particular cancer drug. The drug is not
profitable, due to high fixed costs and a small market size, yet the patients who do buy the drug depend on it for
their survival. The pharmaceutical company currently produces the drug at a total cost of $5/pill and only sells it for
$3/pill. A price increase is unlikely to decrease use of the drug, but will impose significant hardship on many users.
How ethical would it be for the company to raise the price of the drug from $3/pill to $9/pill?
Most people consider it unethical for the company to raise its prices and impose hardship on those who depend on it.
Now imagine that, instead of raising the price, the company sold the rights to produce the drug to a smaller, lesser-
known pharmaceutical company. At a meeting between the two companies, a young executive from the smaller
firm says: “Since our reputation is not as critical as yours, and we are not in the public’s eye, we can raise the price
five fold to $15/pill.”
Would selling the manufacturing and marketing rights to the other firm be more or less ethical
However, when people are asked to evaluate this scenario and the prior scenario jointly, they tend to believe that this
outcome is more unfair than the previous outcome.
4) INDIRECTLY UNETHICAL BEHAVIOUR

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We frequently face tradeoffs between sacred issues and
secular issues. Typically ,these involve considerations of
whether we think it is acceptable to trade a secular item
such as money for compromising a sacredly held value.
The exchange of money for sex is one example of
violating a sacredly held value (taboos against causal sex)
in exchange for money.
The sale of organs is another example, as it involves
violating the view that people are entitled to their organs
in exchange for money.
In the case of exchanging babies for money, the sacred
value of raising your own child is violated
5) WHEN VALUES SEEM SACRED

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Conflicts of interest bias decisions
Disclosure increases bias
Motivated blindness
Financial analyst recommendations
Molestation in the Catholic Church
Credit-rating agencies
Addressing conflicts of interest
Eliminate them
Disclosure is not the solution
Recognize your susceptibility to bias
6) CONFLICT OF INTEREST

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