Economics, Behavioral

Key Ideas from Behavioral Economics and their Applicability to Business Ethics

Three key ideas from behavioral economics are helpful for the study of business ethics. Bounded rationality captures the idea that human beings have limited cognitive abilities that inhibit their abilities to make optimal decisions. Herbert Simon argued that bounded rationality leads to decisions that are perceived to be satisfactory to the decision maker, not optimal. Framing suggests that the way a decision is presented to a decision maker affects the kind of decision that is made. Finally, bounded self-interest suggests that individuals are not simply selfish personal welfare self-maximizers but are capable of true altruism.

If the idea of bounded rationality is true, then it follows that people making ethical decisions in business might (and likely will often) make mistakes. The ability of any individual to factor in all the possible outcomes of a decision, weigh them against some set of criteria, and then make an optimal decision is limited. Trying to make an optimal decision is also time-consuming. No human being can predict the future with complete certainty, and when the outcomes of a decision are hard to forecast (as is the case with many ethical decisions), then ethical decision making will frequently look in hindsight to have been faulty. Stakeholder analyses, for example, require decision makers to account for stakeholder interests and to use forecast benefits and harms to different stakeholder groups in ethical decision making. But in an environment of bounded rationality, it is possible that a decision maker will either forget to [Page 651]include a stakeholder group or forecast the effects of a business decision on one or more stakeholder groups incorrectly—leading to a suboptimal ethical decision. For the same reason, bounded rationality makes utilitarian analyses of decisions—often used in business—problematic in ethical and instrumental terms.

Framing—the idea that the way in which an opportunity for a decision is presented to a decision maker affects the kind of decision that is made—also is useful for analyses in business ethics. Perceptual frames naturally affect the kinds of conclusions that people come to. For ethical decision making in business, framing suggests that the same decision maker can come to different conclusions for the same ethical dilemma. Organizations that want to promote ethical decision making and are cognizant of framing effects might therefore seek to explicitly include ethical considerations in the analysis and framing of business decisions rather than make a decision that everyone commits to and then ask if the decision is ethical or not.

Finally, bounded self-interest suggests that people are willing to sacrifice their own self-interests to help others without hope of return. While the notion of bounded self-interest might seem to represent obvious common sense, it is controversial within the field of economics. If people are capable of bounded selfinterest, then it is possible to appeal to motives other than profit maximization or career advancement. Bounded self-interest suggests that people (say in business) are motivated by a variety of goals: Some of these goals are self interested to be sure, but others might be altruistic. It seems that there might be more freedom for humans to behave ethically within organizations if bounded self-interest accurately describes how most people make decisions.

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