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The objective of this video is to introduce students to the concept of loss aversion so that they can realize how it is one of a series of psychological forces that can cause them to act unethically, almost without realizing it. It is a phenomenon that 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).
The two key things about loss aversion are that people hate losses more than they enjoy gains and that they will take risks (including unethical actions) to avoid losses that they would not take to secure gains. Students can usually grasp this idea 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 she has a 4.0 GPA and views the potential B as a loss. In one experiment, subjects were more likely to be in favor of gathering “insider information” and more likely to lie in a negotiation if facing a loss rather than a potential gain. In real life, loss aversion 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. Martha Stewart was not convicted of insider trading, but of obstructing justice to prevent financial, reputational, and other losses that would come from an insider trading conviction. Frank Quattrone, Wall Streetâ€™s most influential investment banker during the dot.com boom, was not convicted of securities fraud but of inducing subordinates to destroy e-mails that would have created the loss that follows such a conviction.
Loss aversion also means that firms that are performing well, but not as well as they expected to or as other 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.
2. Task â€“ Watch the following video:
1. Studies show that people hate losses twice as much as they enjoy gains? Is that consistent with your experience?
2. Have you ever been caught off guard doing something you probably shouldnâ€™t have been doing (eating the last cookie in the cookie jar, peeking in someoneâ€™s diary, touching your motherâ€™s jewelry) and when surprised with the question: “What are you doing?”, quickly and almost automatically (and falsely) said: “Nothing!”
3. A recent study found that when people were under time pressure, they were more willing to cheat to avoid losses (“losing the sale”) than to accrue gains (“getting the sale”). Do you think that is how you would react?
4. Can you think of any situations where you or someone you know may have made decisions affected by loss aversion?
5. What steps can people take to minimize the chance that loss aversion will help lead them to act unethically?