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Unethical Decision Making
A Coursera Course taught by
Guido Palazzo and Ulrich Hoffrage of the University of Lausanne
October 2016
This document is a transcription of the week 3 videos made available on
the course website and edited for ease of reading.
The Power of Frames: How We Construct Our Reality
How people make sense of the world
In this session you will learn what frames are, understand why they are useful and dangerous at the
same time, and how you can protect yourself against narrow frames.
Look at this painting. In addition to
seeing the painting, you also see a
rather huge and very stylish frame
around it. Why do we put frames
around paintings, pictures, and photos?
What is their function? A frame
separates the painting from the
environment and focuses your
attention on the painting. That’s exactly
what a photographer does when taking
a picture: she selects, and thereby
determines, what the picture will show
and what it will not show. Sometimes
it is important to see the details, so she
uses a zoom lens. At other times it is
important to see the big picture.
Now consider this problem. Here are
with four straight lines without lifting
your pencil from the paper. You will
soon discover that any attempt to solve this puzzle within the “frame”
created by the nine dots will be unsuccessful. The only way to solve
this problem is to widen the frame—to think (or, in this case draw)
outside the box.
Palazzo/Hoffrage Unethical Decision Making
The Power of Frames
1
Here are a couple of the solutions.
This illustrates how useful it can be to adapt a wider perspective and extend the boundaries—
boundaries, it is important to note, that are often self-imposed. Here’s a new task. Watch this short
video clip of three people in white shirts passing a basketball to each other and three people with black
shirts doing the same thing. Your task is to count how often a player with a white shirt passes the ball
to another player with a white shirt. https://www.youtube.com/watch?v=IGQmdoK_ZfY. The term for
the phenomenon demonstrated here is inattentional blindness—the failure to notice an unexpected
stimulus that is in one’s field of vision when other attention-demanding tasks are being performed.
The researcher Daniel Simons reported that about 50% of the people failed to see the unexpected
stimuli. How is this phenomenon linked to framing? We often fail to see or hear things that are not the
focus of our attention. There was no physical frame around the nine dots or around the white-shirted
players, so a frame is a metaphor for the mental structures that simplify and guide our understanding of
a complex reality. Frames focus our attention and force us to view the world from a particular and
limited perspective.
As another illustration, consider the following story: The Sultan dropped in on a meeting of his
advisors and saw that they were having a heated discussion and couldn’t agree on how to proceed.
After watching their antics for a bit, the Sultan said the dispute reminded him of the story of several
men who were blindfolded and brought to an elephant with the task of determining what it was. The
man standing near to one of the legs exclaimed. “It’s a tree!” Another touched the tail and said, “It’s a
rope!” and so on. The point the Sultan wanted to make is that disagreement can result from limited
perspectives—from narrow frames. What we see is determined by how we look.
Let us now consider a real case that happened at the pediatric ward of a hospital. A six-year-old child
was prescribed five milligrams of morphine every four hours to lessen the pain following surgery. The
child received it correctly at 8:00 and again at noon. At 4:00, however, the nurse on duty gave her five
milligrams of methadone, a different drug that should not be used in this situation. At about 5:00, the
patient became very sleepy and finally stopped breathing. Fortunately, she was resuscitated, intubated,
transferred to the intensive care unit, and released after three days without lasting damage.
Put yourself in the position of the Pediatric Executive Board and ask yourself, “What should the fate of
the nurse be?” Not surprisingly, most of the board’s members pointed out that the error was very
serious and concluded that he should be fired. They focused all of their attention on the nurse who had
When unexpected serious events like this happen at this hospital, a group of experts is convened, the
situation is analyzed in detail, and the results of their findings are published in an internal report. The
Palazzo/Hoffrage Unethical Decision Making
The Power of Frames
2
Pediatric Executive Board agreed to wait with their decision until this group published its report. By
doing so, they adopted a wider frame where the whole context would be taken into consideration by
conducting a review of the literature and interviewing the different stakeholders and experts. Their
report identified a number of factors that contributed to the error: The patient: the parents had put a lot
of pressure on the nurses and doctors to alleviate the pain of their child. We will talk about this sort of
pressure in a future session. The environment: the nurses were experiencing a lot of stress since one
nurse called in sick and that left just three nurses to care for 22 patients. Further, the nurse who made
the mistake was young and had little experience with this kind of drug, there was no double-check
protocol before the drug was given, and the young nurse didn’t get any support from the other nurses to
prepare and check the drug. Supplies: the morphine pills and boxes and the methadone pills and boxes
look very similar and are kept next to each other in the pharmacy. And finally, the institution: there
was no automated pharmacy in the wards; methadone was allowed to be stocked in the pediatric units;
there was no pool of nurses able to replace sick staff.
The panel of experts concluded that the nurse was only a part of the drug administration mistake and
made the following recommendations to the Pediatric Executive Board:
Limit the number of patients per nurse to six and create a pool of nurses that can replace sick ones
on a day-to-day basis.
Do not allow methadone in pediatric units as it is not a common used drug in this setting.
Change the label of the methadone box to make it clearly different to that of the morphine box.
Use a systematic double check procedure.
And do not fire the nurse, but offer him additional training.
The board decided to follow these recommendations and learned the importance of framing before
making any major decision.
Let us now consider how frames distort reality. Frames filter what we see, control the information we
attend to and the information that is obscured.
Frames are often hard to see. While we construct reality with our mental structures, we only see the
result of those constructions and call these results “reality”. Our default frames appear to be
complete and appropriate, so we usually fail to consider that there are other frames we could use.
Seen from the inside, there are no holes or gaps. Seen from the outside, important aspects that can’t
be seen from the inside view could be missing.
Frames are exclusive. It is hard to have different views or interpretations of the world at the same
time.
Frames can be sticky and hard to change. It is difficult to change a frame we are locked into
without a lot of conscious effort. When people have emotional attachments to a frame, changing it
can seem threatening and, therefore, even more difficult to change.
How do you become aware of your frames? How do you evaluate their fit? How do you generate new
frames? You must look into the mirror of your frame AND into the mirror itself to try to find out how
you constructed your reality. Start by considering the possibility that there are multiple ways to see the
world; that your frame is just one way to construct reality. Observe the symptoms of how the frame
you are using doesn’t fit reality. Role play the perspective of your adversaries and other stakeholders.
Put yourself in the other’s shoes. Try to anticipate how they see the world, what they focus on, and
Palazzo/Hoffrage Unethical Decision Making
The Power of Frames
3
what they would likely do in a particular situation. Ask others for their views and opinions, making
sure that they can speak openly and without fear. If they can’t, then look for ways for them to express
their views anonymously.
Use subgroups. In an organizational setting, each group is likely to highlight different things. Embrace
your opponents. The best devil’s advocates are those people with who you often disagree. Approach
them without being defensive by appreciating their potential to widen your frames. Seek opportunities
to meet people from other cultures and find out how they think and what they consider to be important.
As Marcel Proust said, “The real voyage of discovery consists not in seeing new landscapes but in
having new eyes.” Traveling will not only allow you to see other places, but also allow you to see your
own environment differently after you return.
To summarize: Frames are mental structures we use to construct reality. They help us focus our
attention and navigate a complex world. This beneficial effect comes with a price of blind spots. We
are generally unaware of the frames we use and, therefore, also unaware of our blind spots. A central
question of this course is, “Do our frames allow us to see ethical dimensions?”
The Enron Story
We will now turn to the Enron scandal with a focus on how their
organizational culture drove ethical blindness. Enron was a
company that seemed to turn everything they touched into gold.
They were seen as the invincible masters of the universe and the
employer everyone wanted to work for until their massive
accounting fraud came to light in 2001 and the company
collapsed. The default conclusion that many draw is that this was
the result of a few criminals—the so-called bad apples—at the top
of a corporation. Our perspective is quite different from this.
Here’s why:
Enron was the result of a merger of two corporations in 1985. Until the early 90s, Enron was the
biggest owner of natural gas pipe lines ever in the U.S and justifiably referred to as “the kings” of the
American pipe line business. Their business model was very simple and very profitable: they were paid
to transport energy from point A to point B. The pipeline business was heavily regulated until 1988,
and this deregulation created two huge problems for Enron: first, they still had the massive debts
incurred by the merger; second, deregulation significantly shrunk their profit margin. They needed a
new and more innovative business model, and Kenneth Lay, the CEO of the company, did what many
companies do when they have to change strategy but have no clue about what to do: he called
McKinsey.
Jeff Skilling, a member of the McKinsey team, put forward the idea of turning Enron into a fossil-fuels
bank. Instead of, for example, just transporting gasoline from point A to point B, the new business
model would be about buying gas, transporting it, and selling it. In addition to charging a fee for
transportation, they could also charge a fee for selling the gas. This approach had the potential of
giving Enron control over the countries whole gas supply chain. Kenneth Lay created a new division in
1990 called Enron Finance Corporation and hired Jeff Skilling to lead that division. Over time, Enron
Palazzo/Hoffrage Unethical Decision Making
The Power of Frames
4
bought up a large part of the gas market and became the dominant actor in both the transportation and
the buying/selling of gas. Their profits soared.
Within a few weeks, this platform became the biggest e-commerce platform that had ever existed in
the world and, soon thereafter, the standard for online trading platforms in general. Next, they began to
trade other kinds of commodities. First they took on electricity and quickly becoming the biggest
electricity marketer in the US. Then they bought the biggest metal trader in the world. Step-by-step,
they became one of the biggest corporations in the world. The value of Enron shares grew by 1,400%
in ten years, hitting and all-time high
of roughly \$90.00 in August 2000.
The market was fascinated by the
success of Enron: Goldman Sachs
characterized them as being
unbeatable at whatever they did.
Fortune Magazine selected them as
innovative company in the world.
Kenneth Lay was praised as an
energy messiah.
Enron employees were encouraged to
do their own trades, invent new
financial products to sell, and to buy
and sell new commodities. By the
middle of 2000, Enron was trading
more than 800 different products and
trading \$8billion per day. The time gap, however, between when they bought a commodity and when
they sold it increasingly became a problem because the more successful they became, the more cash
they needed to bridge this gap. Their high credit costs meant, for instance, that they needed \$2 million
just to pay credits to banks every day in June, 2000. Higher credit costs meant lower profits, and lower
profits meant a lower share price, so Enron needed to find a way to raise more cash without increasing
their debt.
Enter Andy Fastow, Enron’s CFO, who proposed solving this problem with so-called special purpose
entities. These are external partnerships that could be removed from the Enron’s balance sheet. To
qualify as an external partnership, 3% of the property has to be owned by an external investor. Putting
Enron’s debt into these special purpose entities and removing it from its balance sheet meant that
Enron’s performance looked a lot better than it was, and the positive effect this had on its stock price is
easy to imagine. The 3% external partner was actually Andy Festow himself in most cases, so these
entities looked independent, but in reality were still Enron. Meanwhile, Enron continued buying
commodities at an ever faster space while continuing to shift the carrying costs created by the gap
between buying and selling to these special purpose entities.
Let’s summarize the steps that led to the Enron collapse:
There was an increasing skepticism in the market about all new economy companies.
On October 16, 2001 the SEC announced that it was investigating special purpose entities.
Palazzo/Hoffrage Unethical Decision Making
The Power of Frames
5
Roughly one month later on November 28, Enron shares are downgraded to junk status.
The value of the company drops rapidly, and Enron files for Chapter 11 on December 2. The house
To understand how things got to this, we don’t need to go into a detailed analysis of the fraudulent
techniques Enron used or the criminal behavior of the accounting specialists in the company. Instead,
we need to look at the culture of this company to understand how this contagious environment of
cheating emerged. The top execs of Enron were aggressive and greedy individuals. They were driven
by self-interest. They were cheating. They were overtaken by the hubris that was affecting many new
economy companies at that time who saw themselves as being above the rest. They were probably bad
apples in the strictest sense, but we will not understand the Enron scandal if we just look at the
character flaws of the people at the top as this does not explain the scale of deviant behavior
throughout the whole company at every level. The whole barrel, not just a few apples, was rotten.
Many people in many parts of Enron became corrupted—people who came from top universities
(Enron hired mainly from Harvard and Wharton) and never dreamed of becoming criminals. The
atmosphere at Enron seems to have pushed them towards behavior with which they did not expect to
get entangled when they started to work for this company.
What did it mean to work for Enron? The Enron hype is strongly connected to the overall new
economy hype of the late 1990s centered around the debate about the old economy versus the new
economy: old economy meant big,
slow, bureaucratic, corporations;
new economy meant innovative,
high-speed startups. Enron was an
example of how you could turn an
old economy corporation into a
shared mood of the time was that
something very exciting was
happening and the rules that were
valid in the past no longer applied.
Markets were perceived as good
and governments as the problem.
The attitude and behavior of
Enron’s managers was pretty much
in line with the overarching
ideology of the deregulated, rule
breaking, and transformational
new economy companies. The
shareholder-value ideology also dominated the belief system at Enron. Jeff Skilling once said, “We are
doing God’s work. We are representatives of a God-like mechanism that promotes the common good
for everyone through our own self-interested behavior.” Enron was a great example of the spirit of
deregulation and profit maximization of the early 2000s.
While Enron created its own reality and believed that “we are up here, and everyone else is down
there”(what Tom Wolfe called “the master of the universe behavior and attitude”), this reflected the
values and beliefs of the society and economy at that time. Enron is not the exception. Enron managers
Palazzo/Hoffrage Unethical Decision Making
The Power of Frames
6
may have done things that, in hindsight, are clearly wrong, but remember that the goal was to try to
beat the system. Cleverness is probably the term that best describes the overall culture at Enron. While
they are swimming in a sea of hubris from the overall societal context in which they were operating,
there’s also the cleverness that drove the organizational context towards what we would call “ethical
blindness”.
Enron largely hired graduates from top business schools to be traders. They were in their early 20s and
put into a strong context composed of the entrepreneurial aggressiveness of competition, creative
destruction, fast growth, and “you can do what you want as long as you bring in trades”. There was a
flat hierarchy (few layers between the top managers and the traders”; a meritocratic system (instead of
being promoted or being rewarded because of your seniority, you were rewarded because of the trades
you brought in), and large bonuses (large stock options were available to young traders based on their
successful deals). There was a lot of pressure to bring in as many deals as possible at ever higher
speeds. The young traders were loosely controlled (they had a lot of latitude for making their own
decisions, even on big deals) and
inexperienced, so you can imagine
decision-making freedom was given
to people without much experience.
The reward system was based on the
deals that were brought in, so it’s also
not surprising that this became an
integral part of the evaluation and
reward system. A group of 20
year and categorized them as high
performers or low performers. The
high performers (roughly 5%)
You knew it was bonus-day when
you saw new Ferraris parked in front
15% of the low performers were fired on “bonus day”. To survive in such an environment meant doing
whatever was you had to do to meet expectations: don’t criticize your superiors and bring in deals so
you don’t get humiliated on bonus day. Put yourself in the shoes of one of these traders: you are one of
the best and brightest from a top, elite business school and you work for a company that is touted as
the business model of the future. Do you want to be fired after si …
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