Wednesday, April 27, 2011

Ethical Dilemma

Can you “teach ethics?”  I don’t know.  But I do know that we can teach about the economic and social consequences of unethical behavior and challenge students to think through how they themselves would behave when faced with a dilemma.  At FTS, we have devised trading simulations that use experiential learning to focus on individual decisions involving unethical behavior, the relationship to social norms, and the impact of such behavior on social outcomes. 
We do this by letting students trade stocks in a specially designed market simulation.   The market setting provides a unique way for students to not only face ethical dilemmas but to go beyond that and evaluate the implications of unethical behavior by individuals and groups for society.  In the exercise, a subset of market participants is provided with early information on the earnings of a firm. They have the option of accepting the information or declining it. The information is always correct, and if they accept it, it can help them trade and potentially make far greater profits than if they declined it. It is known that the information was not supposed to be leaked; whether it is illegal to accept the information is left ambiguous, but it is fairly clear that accepting it would be considered unethical behavior by most.
The key word above is “potentially.” The value of the information depends on several things. First, how useful the information itself is; this can range in the treatments from being very useful to being marginally useful. Second, it depends on how many people receive information and how many choose to accept it. What is interesting here is that an individual’s decision in each case depends on what they think others in the market are doing, and so in fact is affected by what they think the social norms are. For example, their behavior is typically different “if everyone is doing it” from when they think they may be the only person receiving the information. So the outcome will be endogenous to the group at hand, depending both on their own ethical propensities and their view of the propensity of others (in other words what they think the norm is). Third, there is the market itself: the group behavior can have a strong effect on the market itself. In the FTS Markets, all the trading activity is done by the market participants themselves. In the current context, several outcomes are possible all of which affect the profitability of information. On one extreme, it may be a very active market where you can take advantage of your information. Or it may be the case that the information gets priced into the market quickly, and you only have a brief advantage. On the other extreme, it may be the case that the market collapses: no one wants to trade because they think that the presence of insiders makes it unfair or stacked against them. The actual market outcome is clearly influenced by the ethical propensity of the group as well as their perception; it could be the case that no one engages in unethical behavior yet the market fails because everyone thinks that most people are unethical.
The exercise lets students experience a real life ethical situation which is otherwise very difficult to do in the classroom.
Most of the main points become clear to the participants fairly quickly. This is helped enormously by the fact that they are live participant s in the exercise, and are constantly evaluating both their own behavior and that of the group. The participants face a moral dilemma, and they have to make a decision. Because they make the decision, and the decision directly affects others, whatever decision they make, they will unquestionably think about why they made this decision, and become keenly aware of the consequences of the decision. But it is not an individual decision taken in the abstract; it is influenced by what others do and what you think they may do, and it has a direct consequence on the entire group. This
transforms the discussion of ethics from an abstract textbook world into a dynamic real life situation. Follow on cases allow participants to communicate information to each other, make true or misleading public disclosures and other features that introduce more gray areas and more ethical dilemmas into the case.  Following the trading, the discussion can focus on a variety of issues beyond the specifics of what happened including both social and normative aspects. One that we think is important is the impact on social outcomes; in the market setting of this exercise, one outcome is the liquidity in the market. If there is very little trading, then this has the social consequences of undeveloped capital markets, inability of companies to raise capital, with corresponding impact on growth, the standard of living, and so on.   There are noneconomic outcomes as well that relate easily to participants experience, such as their faith and trust in institutions.
If you are interested in incorporating this exercise, let us know; we will guide you on how to set up different treatments and tell you what we have experienced in running this exercise.


  1. Frustrated Business Ethics ProfessorMay 9, 2011 at 7:17 PM

    I came across this site looking for an in-class activity for my business ethics course. Pedagogically, I think this sort of exercise would be highly effective with regard to "teaching ethics," especially in a business ethics course. Few ethics professors would argue that ethics is something that can be taught within the confines of a lecture hall. Can you cultivate your character by taking an ethics class? Would Skilling or Madoff have acted differently if they had a business ethics class? Probably not.

    A more modest expectation for the ethics professor aims at inciting within the student a critical self-awareness that forces him or her to really think about the nature of his or her ethical values. In a traditional business ethics class, this is typically carried out through analyzing case studies and scandals. But, I must earnestly admit, so few of my business ethics students seem to reach this level of critical self-reflection, with the majority of my students unable (and unwilling) to see beyond the myopic “shareholder” model of corporate responsibility.

    What I like about this activity is that is reveals to the student the complexity of a business transaction and the many different values to be considered in such a situation. In this activity, you cannot think just about the bottom line, for, when you are thrown into this dillema there are multiple factors that must be considered, including, not just economic values, but psychological, legal, and ethical ones as well. I think I would probably have a higher success rate with something like this because it actually brings the student to that moment where he or she must make a decision: “How should I act?” “What is the right thing to do?” “What are the various values that I must consider here, and what are the potential consequences of favoring certain values of others?" Pedagogically, there seems to be a lot of uses for this in the classroom, but I would really love to experiment with the maieutic of this exercise and the self-knowledge that arises out of it. I would love to see how this works!!! Is it possible to have a demo or a trial?

  2. Thank you for the great comment. Please email, I will be happy to schedule a web-meetig and give you a trial account.