This video introduces the behavioral ethics bias known as loss aversion. We hate losses about twice as much as we enjoy gains, meaning we are more likely to act unethically to avoid a “loss” than to secure a “gain.” This phenomenon is known as loss aversion and must be guarded against.
People can relate to the notion that loss aversion has an impact on tax cheating. People will cheat more to avoid a loss than to secure a gain. So, if they have over-withheld, they are less likely to cheat in order to obtain a larger tax refund (which they view as a gain) than they are to cheat if they have under-withheld and are trying to avoid making a tax payment (which they view as a loss).
Students can usually grasp the idea of loss aversion and relate to it in their everyday lives. A student is more likely to cheat to avoid flunking out of school (a loss) than to move from a B to an A (a gain), unless the student has a 4.0 GPA and views the potential B as a loss.
In life, loss aversion often means that people who have made mistakes and perhaps even violated the law through carelessness or inattention often will, upon realizing that fact, take their first consciously wrongful step in order to attempt to ensure that the mistake is not discovered and they do not lose their job or their reputation. They will lie, they will shred, and they will obstruct justice.
In business, loss aversion also means that firms that are performing well, but not as well as they expected to or as well as others expected them to, may engage in unethical behavior because they frame their act of profiting (but not profiting as much as expected) as a loss rather than a gain.
Loss aversion is related to the behavioral ethics concept of framing because the same situation can often be framed as a potential loss or a potential gain, and the difference in framing can definitely affect people’s decisions. To learn more about this concept, watch Framing.
To learn more about how the ethical dimensions of decisions can fade from view, watch Ethical Fading.
The case study on this page, “The Collapse of Barings Bank,” details an extreme case of loss aversion when investment banker Nick Leeson, faced with growing losses, took big risks in attempt to get out from under the losses with dyer effects. For a related case study about the famed fall of a major energy company due to dubious practices, read “Selling Enron.”
Terms defined in our ethics glossary that are related to the video and case studies include: ethical fading, framing, loss aversion, moral cognition, and moral emotions.
Behavioral ethics draws upon behavioral psychology, cognitive science, evolutionary biology, and related disciplines to determine how and why people make the ethical and unethical decisions that they do. Much behavioral ethics research addresses the question of why good people do bad things. Many behavioral ethics concepts are explored in detail in Concepts Unwrapped, as well as in the video case study In It to Win: The Jack Abramoff Story. Anyone who watches all (or even a good part) of these videos will have a solid introduction to behavioral ethics.