Challenges to ethical behavior, and ethical vs legal standards

Why do people behave unethically?

Studying ethics matters because careers throw up unfamiliar situations where the right action is unclear or several choices look acceptable. Two challenges make good conduct harder than it sounds, and both are easy to underrate.

Challenges to ethical conducttogether they push focus to the short term

• Overconfidence bias Memorize we think we are more ethical than average
• Situational influences Memorize external factors we underestimate
  • Money salary, bonus, investment gains
  • Prestige promotion, status, being seen as successful
  • Loyalty to a supervisor, employer or colleagues; often the strongest
  • Others around us Know the idea the bystander effect and peer conformity

Overconfidence

Most people believe their ethical standards are higher than average, which cannot be true for everyone. This overconfidence bias makes us overestimate the morality of our own behavior, especially in situations we have not faced before. We lean on “I am an honest person” and skip the careful checking a decision deserves, even though character alone is not what mainly decides how people act under pressure.

Situational influences

Situational influences are external factors, such as environment and culture, that shape thinking and behavior. Research on social behavior shows that good people with honorable motives can be pushed into unethical choices when the situation is difficult, and that they usually do not notice it happening.

Memorize

• Money. Large salaries, bonuses and investment gains can lead honest people to act in ways others would call unethical. Even mentioning money can reduce cooperation.
• Prestige. Promotion, status and being seen as successful by peers and family.
• Loyalty. To a supervisor, the employer or colleagues. It is extremely powerful, because it tempts people to make compromises they would reject, or judge harshly in someone else, in a different setting.
• Other people. The bystander effect shows that we are less likely to step in when others are present and say nothing. Situations can also push toward good behavior: people act more ethically when they think someone is watching.

All of these are immediate and obvious, while the long-term considerations (your integrity, the integrity of the market, your reputation) feel distant. That is the short-term focus problem: pressure narrows attention to the near term, so long-term costs to clients, the firm and yourself get ignored or minimized, and ethical lapses become more likely.

Picture a team told that the quarter’s numbers “must” hit target. An associate notices a valuation that flatters the results but stays quiet, because the manager is respected and everyone else seems comfortable. Loyalty and the bystander effect have both done their work.

A firm can also fall into a trap. Strong compliance rules are a good start, but a culture that is only about rules can become another situational influence. People tick boxes and ask “What can I do?” when the better question is “What should I do?”.

Is ethical the same as legal?

Legal standards are the rules of conduct set by a legislature or regulator for those within its jurisdiction. Ethical standards are what communities, such as a profession, consider right conduct, and they usually ask for more than the law. Often the two coincide: disclosure rules, for example, require the truth, and following them is ethical.

They do not always coincide.

Types of conduct

• Legal and ethical Memorize most conduct
• Legal but unethical Memorize trading on confidential information where no law forbids it
• Ethical but illegal Memorize some whistleblowing; civil disobedience
• Illegal and unethical fraud, theft

	Ethical	Unethical
Legal	Disclosing all fees clearly	In a market with no insider-trading law, trading on a confidential tip
Illegal	A whistleblower breaching a confidentiality rule to expose fraud (in some jurisdictions)	Fraud, theft

Whistleblowing is the disclosure of dishonest, corrupt or illegal activity by an organization. Depending on the place and facts, the whistleblower may break company policy or even a local law, so the act can be illegal yet considered ethical by many.

Why are laws not enough?

• They usually follow market practice, so harmful conduct continues during the long wait for a response.
• New laws can be vague, conflicting or too narrow, and may remove one problem while creating an opening for a different, similar one.
• They vary across countries, so questionable practices can move to where rules are lighter.
• They are interpreted by market participants, who may read them in the most convenient way or delay compliance.

So ethics needs judgment: thinking through the facts and weighing the interests of every stakeholder, with or without a clear rule. (Standard I(A) in the Code and Standards tells you what to do when law and the Code differ: follow the stricter.)

Exam tip Whenever an option says the law is “the highest standard” or “always the same as ethics”, it is wrong.

Go deeper How mentioning money changes behavior

In one well-known experiment, people played the same cooperation game under two names. When it was called the “Wall Street Game” they cooperated less than when it was called the “Community Game”. Nothing about the payoffs changed. The label alone moved behavior, which shows how a subtle cue can nudge decisions without anyone feeling pressured. The lesson for investment work is not that money corrupts, but that cues of money and competition act on all of us, so build habits that make you stop and look.

Go deeper Why loyalty cuts both ways

Loyalty is a virtue. It builds teams, and colleagues can pull each other toward good conduct, for instance by encouraging each other to take on the discipline of a professional qualification. The same loyalty becomes dangerous when it asks you to stay silent about a problem, to stretch a number or to cover for a friend. A useful test is to ask whether you would judge the same act harshly if a stranger did it. If so, loyalty is doing the thinking for you.