Moral Decision-Making in Economic Transactions

Puja Bhattacharya

Example taken from Foot, Philippa. 1978. Virtues and Vices and Other Essays. Images taken from Joshua Greenes website.

The Trolley Problem

More examples

• Consequentialist – locates morality in the consequences of an act

• Categorical – locates morality in certain rights and duties, regardless of the consequences

Moral Reasoning

Why study moral decision making?

The answers we give in such cases have huge implications in numerous practical areas, such as abortion, taxes, capital punishment, immigration policy etc…

Rhino auction in NamibiaThe ethical dilemma of self-driving cars

Consequentialist - Utilitarianism

• Jeremy Bentham

• Maximize utility

• The greatest good for the greatest number

• Cost-benefit analysis

1748 - 1832

• Czech health ministry wanted to raiseexcise taxes on cigarettes in 2001, concerned about the negative healtheffects

• Phillip Morris commissioned a consultancy (Arthur Little) to report on a cost-benefit analysis to the government.

Benefits

• Customs duty• Corporate Inc. tax• VAT• Excise tax

• Savings on housingfor elderly due toearly death

• Pension savings due to early mortality

• Healthcare costssavings due to earlymortality

Costs

• Fire induced costs

• Lost income due tohigher mortality

• Days out of workrelated public financecosts

• ETS related healthcare costs

• Smoking (first hand) related health care costs

Total Cost Total Benefit15,647 m CZK 21,463 m CZK

Can you attach a dollar value to everything, even life?

The very idea of life insurance (“You want to set a price on your life, and then place a bet on your date of death?’’) was met with repugnance in the early 1800s (Zeiler, 1979)

Dwarf tossing - UN banned dwarf tossing on grounds of protecting human dignity. Argument raised…“that there is no work for dwarves in France and that his job does not constitute an affront to human dignity since dignity consists in having a job.”

Examples taken from Roth, Alvin E. "Repugnance as a Constraint on Markets." Journal of Economic perspectives 21.3 (2007): 37-58.

Individuals perception of what is moral depends on the type ofcommodity being traded.

Does perception of morality change with instituitions? Does a market environment change the perception of morality?

Falk, Armin, and Nora Szech, "Morals and Markets." Science(2013)

Question: Does market interaction change the valuation of harmdone to third parties i.e. those who suffer from trade but are NOT trading.

Design: Study the trade-off between life and money.

• Subjects decide between accepting money and saving the life ofa mouse.

Design• Students from University of Bonn

• 3 treatments

Individual

• Subjects decided whether theywanted to accept €10 and have a mouse killed.

• 124 subjects

Market - Bilateral

• A buyer and seller bargain over killing a mouse.

• Seller is endowed with a mouse.• Buyer has €20• Double auction• If trade occurs

• Buyer gets €20 – p• Seller gets p• Mouse is killed.

• No trade, buyer and seller gets 0 –mouse lives.

• 72 subjects

Market - Mutilateral

• 7 buyers and 9 sellers• Each seller endowed with a

mouse.• Double auction• If seller sells, the mouse is

killed.• Unsuccessful trades get 0.• 96 subjects.

Market interactions display a tendency to lowermoral values, relative to individual statedpreferences.

Markets comprise of two or more people: responsibility and guilt may be shared

Reveals information about norms

Framing on materialistic aspects

Why?

How should we think about the results?

We have to ask where markets belong – and where they don‘t.Michael Sandel

Examples taken from Roth, Alvin E. "Repugnance as a Constraint on Markets." Journal of Economic perspectives 21.3 (2007): 37-58.

Individuals perception of what is moral changes with the type ofcommodity being traded.

Individuals perception of what is moral changes with instituitions.

Does perceptions of what is moral change with how an action isundertaken?

Based on article from New York Times

• Feb 3rd, 2006: Joyce Elkins pays $77.5 for a 2 week prescription of Mustargen, a cancer drug.

• Feb 17th, 2006: Joyce returns for a refill. Price is $548.01.

• Merck sold the rights to sell Mustargen to Ovation, which raised the price 10 times.

• Turing Pharmaceuticals bought Daraprim, raised its price by 5,000% overnight.

• There was widespread criticism towards Ovation. But what about Merck?

A major pharmaceutical company, X, had a cancer drug that was minimally profitable. The fixed costs were high and the market was limited. But, the patients who used the drug really needed it. The pharmaceutical was making the drug for $2.50/pill (all costs included), and was only selling it for $3/pill. The pharmaceutical firm raised the price of the drug from $3/pill to $9/pill, thus increasing the value of the drug to company X by $10 million.

On a scale of 1 (not at all unethical) - 10 (very unethical), how unethical do you think company X's behavior was in this decision?

From Paharia, N., Kassam, K. S., Greene, J. D., & Bazerman, M. H. (2009). Dirty work, clean hands: The moral psychology of indirect agency. Organizational Behavior and Human Decision Processes, 109(2), 134-141.

A major pharmaceutical company, X, had a cancer drug that was minimally profitable. The fixed costs were high and the market was limited. But, the patients who used the drug really needed it. The pharmaceutical was making the drug for $2.50/pill (all costs included), and was only selling it for $3/pill. The major pharmaceutical X sold the rights to a smaller pharmaceutical, Y, for $12 million. In order to recoop costs, company Y increased the price of the drug to $15/pill.

On a scale of 1 (not at all unethical) - 10 (very unethical), how unethical do you think company X's behavior was in this decision?

From Paharia, N., Kassam, K. S., Greene, J. D., & Bazerman, M. H. (2009). Dirty work, clean hands: The moral psychology of indirect agency. Organizational Behavior and Human Decision Processes, 109(2), 134-141.

Coffman, Lucas, "Intermediation Reduces Punishment." AEJ: Micro (2011)

Question: Does perception of what is moral depend on whether an action is directly or indeirectly taken.

Design: Study punishment decision by a third party (judge) fordecisions in a dictator game.

Design

• 4 players –

• -$10

• - $5

• - $0

• - $5

A B C D

A

B

C

D

A C$10 DG

A chooses how much he keeps ($5, $6, $7, $8, $9,$10)

ORA C

B

A sells DG to B for price p ($5, $6, $7, $8, $9, $10)

B plays DG ($5 – p + $10) with CB cannot lose money

• If A plays DG and keeps $7, B gets $5, and C gets $3• If A sells DG for $7, B plays $8 DG with C

(B keeps at least $5, C gets at most $3)

• Whether the DG was sold, if so at what p.• Amount sent in DG

D Observes

• Decides how much to punish A

• If A plays DG and keeps $5 C gets $5, and B gets $5 • If A sells DG for $5 B plays $10 DG with C.

Keeping fixed what A extracts, using an intermediary B weakly reduceswhat the poorest player C gets.

b

Discussion

• Intermediation Reduces Punishment

• Why Do We Care?• Subjects use the intermediary• This hurts the poorest player

• Why Does Intermediation Reduce Punishment?

31

• Intermediation Reduces Punishment

• Why Do We Care?– Subjects use the intermediary– This hurts the poorest player

• Why Does Intermediation Reduce Punishment?

Subjects Use the Intermediary• 52% of subjects (33/64) sell the Dictator Game.

• Comments from Post-Experiment Questionnaire:• “I was trying to gain money for myself without causing D to reduce me so I sold to

player B.”

• “I wanted to sell my game because then I didn’t look too selfish and D wouldn’t reduce me.”

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Subjects Rationally Use the Intermediary

4

4.25

4.5

4.75

5

5.25

5.5

5.75

6

$5 $6 $7 $8 $9 $10

Expe

cted

Pos

t-Pu

nish

men

t W

ealth

of A

($)

Amount A Keeps ($)

DirectIndirect

UnsoldSold

Discussion• Intermediation Reduces Punishment

• Why Do We Care?• Subjects use the intermediary: 52%• This hurts the poorest player: Payout decreases 64%

• Why Does Intermediation Reduce Punishment?

34

• Intermediation Reduces Punishment

• Why Do We Care?

• Why Does Intermediation Reduce Punishment?– Diffusion?– Confusion?– Directness?

Discussion

35

• Intermediation Reduces Punishment

• Why Do We Care?

• Why Does Intermediation Reduce Punishment?

• Intermediation Reduces Punishment

• Why Do We Care?

• Why Does Intermediation Reduce Punishment?• Diffusion?• Confusion?• Directness?

Discussion

36

Individuals perception of what is moral changes with the type ofcommodity being traded.

Individuals perception of what is moral changes with instituitions.

Individuals perception of what is moral changes with how an action isundertaken.

What have we learned?

Part 2 : Deception in Economic Markets

• Compare hotel reviews on versus

• A hotel located next to a small independent hotel, will on average have 6 more negative TripAdvisor reviews (than Expedia reviews) as compared to an isolated hotel.

• Anyone can post a review on TripAdvisor. Only travellers who stay booked at thehotel can post review on Expedia.

• 6 more negative “fake” Tripadvisor reviews!

Mayzlin et al., "Promotional Reviews" AER(2014)

NYT article and cracked.com

Deception

• Deception is common in situations with asymmetric information• One party has more information than another

• Tax Evasion, false advertisement, corruption

• Obtaining reliable outcome of deception is extremely difficult.

• Deception is done in secret, and any effort to identify may itselfchange behavior.

Fischbacher and Föllmi-Heusi. "Lies in Disguise—An Experimental Study on Cheating" JEEA (2013)

• Each participant received a fair 6-sided die

• They had to roll it and memorize the number

• Experimenter cannot see the number rolled.

• The payoff would equal 1, 2, 3, 4, or 5 CHF if the die number that came up was the corresponding payoff amount, and 0 CHF if the die number that came up was a 6.

Cool design: identifies lying even without the experimenter knowing thetruth!

Abeler et al. “Representative evidence on Lying Costs" JPubE (2014)

• How much does a representative German lie?

• Participants were called at home

• Asked to toss a coin and report their type, i.e., either “heads” or “tails”

• Reporting tails yielded a payoff of €15, which participants could choose to receive in cash or as an Amazon gift certificate, while reporting heads yielded 0.

Kroll and Rustagi. "Shades of Dishonesty and Cheating in Informal Milk Markets in India" WP

• Setting: Buffalo milk market in India• Quality uncertainty: detection of added water in milk is difficult.

• Design: Two parts a) lab exp b) field data• Informal milk market clusters (6 dairies) in Delhi• Lab: Die rolling experiment – milkmen asked to roll die 40 times and report

number on each roll• Field: Assistants are hired to pose as customers and buy a litre of milk from

milkmen in the sample

Summing Up

• Moral reasoning – what is morally permissible?

• Utilitarian. Is Bentham always right?

• Do markets erode morality? How should we approach the question of what goodsshould be traded and what not?

• Delegation. Are we wiser now?

• Deception. Simple steps to get to the truth.

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