During the trying times that have followed the financial collapse of 2008, a long list of culprits has been blamed: homebuyers, mortgage lenders, bankers, Congress, and the Bush administration. Many of these parties engaged in intentional unethical behavior. But many other parties, including the auditors charged when evaluating the books of the firms that collapsed, as well as the credit rating agencies (Standard and Poors's, Moody's, and Fitch) that gave the securities of those firms stellar ratings, simply didn't notice the data that could have predicted what would follow. Moreover, many of us bystanders failed to notice not only the conditions that were bound to lead to dangerous, unethical behaviors, but also the obviously unethical behaviors when they did occur.
Researchers have documented that our ethical "blind spots" keep us from noticing the unethical behavior that surrounds us and acting to create more ethical environments. To take one example, Bernard Madoff was a crook who intentionally engaged in illegal behavior. More interestingly, many other people had access to sufficient data to have known that Madoff's business was a Ponzi scheme, yet they did notice or act on this data. The majority of Madoff's investments occurred through feeder funds. These feeder funds either marketed their access to Madoff to potential investors or claimed they had access to an exotic, highly successful investment strategy. In actuality, even the latter group of feeder funds wase simply turning the money they collected over to Madoff. Managers of the feeder funds often received a small percentage of the funds invested, plus 20% of any investment profits earned. As Madoff claimed an amazing record of success, those managing the feeder funds were getting rich.
Analysts now conclude that outperforming all kinds of markets, as Madoff did, is statistically impossible. How is it possible that the managers of the feeder funds simply failed to notice that Madoff's performance reached a level of return and stability that was impossible? These managers lacked a motivation to see evidence that was readily available to them. René-Thierry Magon de la Villehuchet, the CEO of Access International Advisors and Marketers and a descendent of European nobility, invested his own money, his family's money, and money from his wealthy European clients with Madoff. When he was presented with clear data that Madoff's returns were not possible, he explained away the data and ignored the overwhelming evidence. After Madoff surrendered to authorities, de la Villehuchet killed himself in his New York office.
Extensive research shows that people who have a vested self-interest in a situation have difficulty approaching the situation without bias, even when they view themselves to be honest and ethical people. When we have an incentive to see someone in a favorable light, we have difficulty accurately noticing when that person (or company) is behaving unethically. Across most major scandals of the last decade (including the fall of Enron, Worldcom, AIG, and Madoff's feeder funds), boards of directors, auditing firms, and rating agencies had access to enough data to notice and act on the unethical behavior of others, yet failed to do so. Our psychological tendencies prevent us from not noticing data that we would prefer not to see.
As a result of the scandals of the past decade, ethics has become a boom topic, and the demand for ethics training in professional schools has spiked. Growing understanding of our ethical blind spots is pushing the topic of business ethics in new and promising directions. Before the collapse of Enron, if you attended a meeting of the Academy of Management (the leading convention for management professors), the few sessions on ethics were dominated by philosophical discussions. Today, management researchers are integrating ethics research about the psychological and organizational processes that induce blind spots. Interest in this approach to ethics, often called behavioral ethics, can help all of us notice the unethical actions around us.