Monkey Business: A Neo-Darwinist Approach to Ethics Codes

CFA Institute

Monkey Business: A Neo-Darwinist Approach to Ethics CodesAuthor(s): John DobsonSource: Financial Analysts Journal, Vol. 61, No. 3 (May - Jun., 2005), pp. 59-64Published by: CFA InstituteStable URL: http://www.jstor.org/stable/4480671 .

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Financial Analysts Journal Volume 61 * Number 3 |Y

)2005, CFA Institute

PERSPECTIVES

Monkey Business: A Neo-Darwinist

Approach to Ethics Codes

John Dobson

It is indeed true that "It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own interest" (Smith, 1937, vol. I, p. ii). And just as butcher, brewer, and baker generally act with regard to their own interest, so too do their customers. But if, on entering the butcher's shop as an habitual customer I find him collapsing from a heart attack, and I merely remark 'Ah! Not in a position to sell me my meat today, I see,' and proceed immediately to his competitor's store to complete my purchase, I will have obviously and grossly damaged my whole relationship to him, including my economic relationship, although I will have done nothing contrary to the norms of the market.

Alasdair Maclntyre Dependent Rational Animals

(1999)

E thics codes are now ubiquitous in financial organizations. CFA Institute devotes a sig- nificant portion of its professional training to ethics: Knowledge of ethics is viewed as

an integral part of qualification for the CFA charter. A central question about our practice of ethics, however, remains unanswered: To what extent do these codes and training achieve their desired objective?

Given that adherence to these codes involves motivation as well as action, the success of ethics codes will always remain uncertain, but recent financial scandals indicate that the success of ethics codes has been limited (at best). Indeed, many practitioners argue that ethics codes are really nothing more than legal window dressing, designed purely to minimize litigation exposure; the codes may alter behavior in the sense of making individuals aware of the litigation risk of certain actions, but no one really expects ethics codes or training to alter actual motivation to any substantive degree. For example, in their study of 160 corporate codes, Beneish and Chatov concluded that "managers choose code content so as to reduce the expected cost of adverse legal or regulatory action" (1993, p. 29). Thus, ethics codes are not really codes in the sense of genuine guides to managerial motivation and behavior; they are litigation cost-minimization codes.

A primary reason for people's skepticism about ethics codes is the widespread belief that the behav-

ior espoused in ethics codes is, in a fundamental Darwinian sense, unnatural. I label this attitude the "naive-Darwinist argument," and it goes generally as follows. People, particularly people in business environments, act and are motivated to act largely in a way consistent with the dictates of economic theory. People really are homo economicus: They are personal wealth-maximizing opportunists who will lie, cheat, or steal whenever their personal cal- culus indicates that such behavior will maximize their own personal wealth. These so-called rational people will certainly, on occasion, cooperate or build a reputation for some cooperative trait, but they will do so only to the extent that such activity furthers their own personal material ends. In the parlance of game theory, any cooperative strategy inevitably unravels in the endgame; cooperation in the sense of concern for the welfare of the other is always strictly instrumental to the ends of the self. In financial organizations, such behavior is often excused by naive-Darwinist metaphors such as "a jungle out there," "a dog-eat-dog world," or "sur- vival of the fittest." Thus, the behavior espoused in ethics codes, so this argument goes, is hopelessly idealistic: It is irrational and unnatural.

In finance theory, the agency literature has long addressed the issue of behavioral interaction. But it invariably focuses on the contractual situation rather than on the rationality construct of the individual in that situation. That the individual acts in accordance with homo economicus is taken as given, as simply "natural." Take, for example, Jensen's 2004 article on the financial excesses of the

John Dobson is professor offinance at Orfalea College of Business, California Polytechnic State University, San Luis Obispo.

May/June 2005 www.cfapubs.org 59



Financial Analysts Journal

1990s. On the first page, Jensen states that "the root cause of the problem was not the people but the system in which they operated." From then on, the focus of the article is entirely on reforms to the corporate governance structure. The behavior of the individual is taken as a given: The individual is homo economicus and so must be controlled by the external structure. The idea that individual motivations can be modified is not considered.

Recent evidence that this naive-Darwinist view extends from finance theory to practice came my way as a result of responses to my last Perspectives article, "Why Ethics Codes Don't Work" (2003). In the article, I argued that individuals in business schools and financial organizations are acculturated into a view of business activity that is fundamentally antithetical to the type of behavior espoused in ethics codes. Although I was happy to receive several responses from practitioners, I was alarmed by how respondents took for granted the premise that opportunistic and guileful self-interest (i.e., homo economicus) was simply natural.1 I was alarmed because this misapprehension concerning the most basic elements of human nature is undoubtedly a major reason ethics codes do not work. In a naive- Darwinist view of human nature, the values espoused in a code-such as empathy, honesty, and integrity-are irrational and unnatural as values in and of themselves. Why should you be honest if you receive no tangible material benefit from it?

The root of the acculturation problem, therefore, is a fundamental misapprehension concerning human nature. Financial practitioners and theorists appear to have confused the simple rationality assumptions of economics with laws of nature.

This article addresses a major reason why this morally impoverished acculturation occurs in financial organizations-namely, the naive-Darwinist belief that the behavior espoused in ethics codes is unnatural and thus irrational. My educational mission is to lay to rest once and for all the myth that the character of homo economicus describes, or even approximates, human nature.

Although dispelling this myth may not be suf- ficient to ensure the success of ethics codes, it is certainly a necessary first step. The success of an ethics code rests centrally on the belief that the behavior it espouses is reasonable, rational, and desirable. No one can be expected to adhere to, or respect, behavioral prescriptions that are generally viewed as irrational and unnatural, which, sadly, is exactly how ethics codes are currently viewed in many financial organizations.

My educational mission is made easier by recent developments in biology, psychology, and neuroscience-the developments that I am refer- ring to in the title of this article as "neo-Darwinist"

(as distinct from naive-Darwinist). These developments establish the naturalness of such motivations as empathy, sympathy, fairness, justice, reciprocity, and community concern as ends in themselves. The crucial point is that these motivations are not merely instrumental to achieving the material goals of the self, as they are in the homo economicus of naive- Darwinism. Rather, by addressing basic human drives, these motivations are natural in and of themselves. A business school or financial organization that recognizes this fact will no longer have a problem assimilating an ethics code; the behavior espoused in the code will become the natural basis for the acculturation process in the organization.

Moral philosophy has long established the "ought" justification for ethical behavior. Recent developments in the natural sciences are establish- ing the "is" justification. I summarize these recent developments.

The "Ultimatum Game" The same basic assumptions about behavior are used in all applications of economic analysis. People are assumed to want to get as much for themselves as possible, and are assumed to be quite clever in figuring out how best to accomplish this aim.

Richard Thaler The Winner's Curse:

Paradoxes and Anomalies of Economic Life (1992)

One way to test the empirical validity of homo economicus is the ultimatum game of game theory. The basic ultimatum game involves two players, who are unacquainted, and a single iteration. Player 1, known as the Proposer, is allocated a sizable amount of money. She is then instructed to offer some portion of the amount to Player 2, known as the Responder. Both Proposer and Responder know the amount of the original allocation. The Responder is instructed to either accept the offer or refuse it. Refusal leads to the loss of all the original allocation of money to both players. If the Pro- poser's offer is accepted by the Responder, both players can keep their respective shares.

Homo economici have obvious strategies for this game: The Proposer should offer to share a very small percentage of the original allocation, say 5 percent. It will be "rationally" accepted by the Responder because it is better than nothing.

But when individuals play this game, few act in accordance with the rationality of homo economicus (Lawrence 2004): The typical allocation is 20-50 percent. Responders who are offered less than 20 percent generally refuse the offer. They "irrationally" take nothing rather than accept an offer that seems to them unfair. In other words, the

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Monkey Business: A Neo-Darwinist Approach to Ethics Codes

principle of fairness has intrinsic value to them, and they are prepared to uphold that principle even in the face of a guaranteed material loss.

Exposure to the behavioral logic of homo economicus through economic game theory can change this behavior. For example, experiments involving economics students indicate that they tend to place less intrinsic value on fairness (Frank, Gilovich, and Regan 1993). In the introduction to Games and Infor- mation, Rasmusen notes that "game theory has become dramatically more important to main- stream economics" (1989, p. 13); the rationality assumption in this methodology is typically nar- row and focused on the individual attaining some atomistic payoff through competitive interaction with one or more other individuals. For example, in their extensive review of economic game theory, Hausman and McPherson noted that game theory "does not rule out altruism or sympathy ... but it does rule out a collective perspective, a perspective that considers what we should do and what the consequences will be for us" (1993, p. 718).

Indeed, game theory's distorted view of human interaction is attracting concern among ethicists. Grant recently summed up these concerns as follows:

Employment of game theory ... involves much more than the adoption of the neutral strategy that this approach itself professes to be. This method of analysis comes with built-in visions of ourselves, of the nature of business, and of the nature of reality as such. It assumes and promotes an individualistic as opposed to a social view of human life, a preference for calculative over reflective reason, and a vision of reality that undermines appreciation of finer human virtues and the spiritual aspirations that sustain these. (2004, p. 321)

But if the behavior espoused in economic theory and rewarded in game theory is not natural human behavior, what is? How would the rational behavior of a neo-Darwinist-type individual differ from that of homo economicus? To answer these questions, I turn first to a group who have defi- nitely never been exposed to economic game theory, namely, nonhuman primates.

Primate Behavior Any animal whatever, endowed with well- marked social instincts, the parental and filial affections being here included, would inevitably acquire a moral sense or conscience, as soon as its intellectual powers had become as well developed, or nearly as well developed, as in man.

Charles Darwin The Descent of Man

(1871)

The results of the ultimatum game summarized in the last section indicate that many humans place some intrinsic value on fairness or fair distribution. This trait is not unique to humans; studies of primate behavior have found a similar tendency. De Waal (1997), for example, played a variant of the ultimatum game with two chimpanzees kept in adjoining chambers. One subject was given food and was given no incentive to share it. The chimpanzee originally given the food did, however, vol- untarily share the food with its neighbor. As with humans, chimpanzees appear to place an intrinsic value on fair distribution (Flack and De Waal 2004).

Nonhuman primate communities also exhibit a rudimentary sense of justice. Senior group mem- bers have been observed to intervene in disputes to arbitrate between the antagonists. De Waal relates one such instance:

On one occasion, a quarrel between Mama and Spin got out of hand and ended in biting and fighting. Numerous apes rushed up to the two warring females and joined the fray. A huge knot of fighting, screaming apes rolled around in the sand, until Luit [a senior male] leapt in and literally beat them apart. He did not choose sides in the conflict, like the others; instead anyone who continued to fight received a blow from him. (1982, p. 124)

Exhaustive observation of primate groups by many researchers over many years indicates that these social animals exhibit many behavioral traits that could be considered ethical, in the sense of being consistent with the type of behavior pre- scribed in a typical human code of ethics:

Sympathy-related traits such as attachment, succorance, emotional contagion and learned adjustment in combination with a system of reciprocity and punishment, the ability to internalize social rules and the capacity to work out conflicts and repair relationships damaged by aggression, are found to some degree in many primate species, and are fundamental to the development of moral systems. (Flack and De Waal, p. 31)

Another particularly revealing finding from these studies concerns the acculturation of newcomers. The behavior adopted by new arrivals to any group depends heavily on how they think the group expects them to behave. If a newcomer believes that the group expects him to be aggressive, he will be aggressive. If the newcomer believes that the group expects him to be peaceable and cooperative, he will be peaceable and cooperative: The moral tenor of the group determines the moral





tenor of the individual. This primate adaptability to social norms was found through observation of olive baboons:

... males new to the group somehow picked up on how they were expected to behave by watching what was going on.... Cultural transmission of, for want of a better word, manners, has never before been observed outside homo sapien. (Sapolsky and Share 2004, p. 77).

In the case of new recruits to financial organizations or baboons, then, what is valued by the group quickly becomes valued by newcomers to the group. If the group values acquisitiveness and aggression, so will the new individual; if the group values cooperation and concern for the other, so will the individual. As the baboon example dem- onstrates, in the most fundamental sense of the word, either value system is natural.

Neuroscience The small strength and speed of man, his want of natural weapons etc. are more than counter-balanced by his . .. social qualities, which led him to give and receive aid from his fellow men.

Charles Darwin The Descent of Man

(1871)

The naive-Darwinist notion of the relationship between human nature and ethics is summed up neatly by Katharine Hepburn's character, Rose Sayer, in the film The African Queen. When Charlie Allnut (played by Humphrey Bogart) tries to excuse his ill-mannered behavior by saying "it's only human nature," Hepburn replies, "Nature, Mr. Allnut, is what we are put in this world to rise above." The scene thus invokes the classic conflict between natural behavior and ethical behavior.

Recent biological and neuroscientific research, however, indicates that this conflict is largely illu- sory. In fact, humans have many innate tendencies toward what is traditionally regarded as ethical behavior: We naturally feel empathy and compas- sion, and we naturally have genuine concern for the welfare of others. Indeed, humans use moral criteria in preference to other criteria in making judgments. Messick (2004) undertook a series of experiments to determine the most natural way in which people evaluate stimuli. He tested various scales of evalua- tion (the "semantic differential") people might use in making judgments and found the following:

Concepts could be rated on a series of bipolar scales, like 'strong-weak,' 'good-

bad,' 'beautiful-ugly,' and 'active-passive.' The ratings on a large series of such scales were then statistically analyzed to see which clusters of scales were intercorrelated in order to identify the underlying dimensions of judgement. The results of many studies in all parts of the globe indicated that the most basic dimension was an evaluative dimension, a 'good-bad' dimension of judgement. (p. 131)

Evaluative judgments are so natural that we are often not consciously aware of them. Take, for example, an experiment used by child psychologists called the "Charlie Task." Cosmides and Tooby (2004) summarized the experiment and its implications as follows:

A child is shown a schematic face ("Charlie") surrounded by four different types of candy. Charlie's eyes are pointed toward the Milky Way bar (for example). The child is then asked, "Which candy does Charlie want?" Like you and I, a normal 4 year old will say that Charlie wants the Milky Way-the candy Charlie is looking at. In contrast, children with autism fail the Charlie Task, producing random responses. However-and this is important-when asked which candy Charlie is looking at, children with autism answer correctly. That is, children with this developmental disorder can compute eye direction correctly, but they cannot use that information to infer what someone wants. (p. 99)

This inference concerning the desires of another, which the autistic child is unable to make, is, in a fundamental way, natural. To survive as a social animal, evolution has hard-wired us with an innate awareness of the wants and desires of others. Recent developments in brain scanning and imag- ing techniques have enabled researchers to monitor brain activity during moral deliberation. What researchers have found is that certain behavior stimulates certain parts of the brain: "There is a little inference circuit-a reasoning instinct-that pro- duces this inference" (Cosmides and Tooby, p. 99).

In summarizing the work of several behavioral psychologists, Messick explicitly made the connec- tion between the type of natural inference identified in the Charlie Task and ethical behavior: "There is good reason to think that empathy, vicarious emo- tionality, is hard-wired in some way" (p. 130).

In broader motivational terms, Lawrence and Nohria (2002) suggested that the human brain directs activity in accordance with a desire to sat- isfy four basic drives: * to acquire; * to defend; * to learn; * to bond.

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Monkey Business: A Neo-Darwinist Approach to Ethics Codes

They summarized the actual brain function involved in satisfying these drives as follows:

Neural signals from our sense organs are fed through the limbic modules and there pick up markers that code them as opportunities or threats to the fulfillment of these drives. These coded signals move on to the pre-frontal cortex, the seat of consciousness, where they are manifested as emotion-laden representa- tions. At this point the relevant skill sets and memories are activated and drawn into the working memory to aid in formulating a variety of action scenarios. These possible lines of response are weighted for their prom- ise in fulfilling the drives (all four if possible) in the current situation.... The chosen action plan is moved back through the limbic area to be energized and then sent to the motor centers for activation. (pp. 60-61)

Although this mental process appears lengthy when it is spelled out, the entire process takes only a fraction of a second; as with the Charlie Task response, it is largely subconscious.

The question is: In this mini-second formula- tion of an "action plan," which drive dominates? This is the point at which issues become particularly interesting for this article because the con- scious human brain apparently is very malleable when it comes to choosing among the basic drives. Although all four drives may be natural, whether a particular individual or group places more empha- sis on the drive to bond or on the drive to acquire is a matter of nurture, not nature. For example, the more acquisition-driven and less bonding-driven behavior of business students playing the ultimatum game is presumably the result of their being nurtured by homo economicus. And it cannot be explained by self-selection (i.e., drive-to-acquire types of individuals choosing careers in business): Students entering business school behave no differ- ently from the general population of students, but students exiting business school exhibit signifi- cantly less cooperative behavior (Frank et al.; Dob- son 2003). Business school educates students into a focus on the drive to acquire.

But note well that this phenomenon is not a case of business education, in school or on the job, breaking down various societal constraints and customs to reveal the true natural desires of the individual. Rather, it is a case of business education emphasizing one natural drive-the drive to acquire-while largely ignoring another, equally natural drive-the drive to bond.

Implications for Successful Ethics Codes

Virtues are to be understood as those [natural] dispositions that will . . . sustain us in the relevant kind of quest for the good, by enabling us to overcome the harms, dangers, temptations and distractions which we encounter, and which will furnish us with increasing self-knowledge and increasing knowledge of the good.

Alasdair Maclntyre After Virtue

(1981; second edition 1984)

The evidence from biology and psychology shows that in advocating virtuous behavior, such as honesty and empathy, ethics codes are advocating natural behavior. As the quotation at the beginning of this article makes clear, a genuine concern for the welfare of others-in this case, a stricken butcher- comes naturally and should not be repressed. In aiding the stricken butcher, you not only help perpetuate your business and personal relationship with him; you also help perpetuate the complex web of indirect reciprocity essential to sustain the economic system through which you derive your dinner. As Maclntyre wrote:

Internal goods are indeed the outcome of competition to excel, but it is characteristic of them that their achievement is a good for the whole community. (1984, p. 450)

In a neo-Darwinist light, therefore, as a financial analyst or other finance professional, you act entirely naturally and in your self-interest by nur- turing a genuine concern for the client, the professional body, professional associates, and so on. It is natural for you to have these group-oriented concerns, and the ethics code can nurture these natural tendencies.

The fundamental misconception that must be addressed in any organization is that ethics codes constrain self-interest. This myth implies that the codes must be ignored, evaded, or circumvented if one is to achieve one's goals. The truth that needs to be made clear is that ethics codes actually define self-interest: They define the true professional as one who has a genuine concern for others in his or her professional milieu.

By emphasizing the interests of the group as well as those of the individual, the ethics code can nurture and guide the innate moral propensities of employees, leading them to flourish profession- ally. In addition to providing rules and guidelines, therefore, the ethics code must be fundamentally aspirational.





Contrary to the dictates of homo economicus, to be guided by a code of ethics entails correctly defin- ing one's self-interest as commitment to the profession and to the community. An organizational culture that recognizes and nurtures the drive for bonding through the active implementation of an ethics code, from top management on down, is a successful one. Those guided by the code will be

successful professionals. In the business jungle, as in the primeval jungle, the keys to success are honesty, fair dealing, and cooperation. Man is a social animal.

I would like to acknowledge the input of Cyrus Rame- zani and Luc Soenen in formulating the ideas behind this article.

Note 1. See, for example, the "Letters to the Editor" section of the

March/April 2004 Financial Analysts Journal.

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Cosmides, Leda, and John Tooby. 2004. "Knowing Thyself: The Evolutionary Psychology of Moral Reasoning and Moral Sentiments." Business Ethics Quarterly, Ruffin Series No. 4 (Special Issue on Business, Science, and Ethics):93-128.

De Waal, F.B.M. 1982. Chimpanzee Politics: Power and Sex among Apes. London, U.K.: Jonathan Cape.

. 1997. "The Chimpanzee's Service Economy: Food for Grooming." Evolution and Human Behavior, vol. 18, no. 6 (November):375-386.

Dobson, John. 2003. "Why Ethics Codes Don't Work." Financial Analysts Journal, vol. 59, no. 6 (November/December):29-34.

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Frank, R., T. Gilovich, and D. Regan. 1993. "Does Studying Economics Inhibit Co-Operation?" Journal of Economic Perspectives, vol. 7, no. 2 (Spring):159-171.

Grant, Colin. 2004. "The Altruists' Dilemma." Business Ethics Quarterly, vol. 14, no. 2 (April):315-328.

Hausman, Daniel M., and Michael S. McPherson. 1993. "Taking Ethics Seriously: Economics and Contemporary Moral Philosophy." Journal of Economic Literature, vol. 31, no. 2 (June):671-731.

Jensen, Michael C. 2004. "Agency Costs of Overvalued Equity." Harvard NOM Research Paper No. 04-26.

Lawrence, Paul. 2004. "A Biological Base for Ethics." Business Ethics Quarterly, Ruffin Series No. 4 (Special Issue on Business, Science, and Ethics):59-80.

Lawrence, Paul, and N. Nohria. 2002. Driven: How Human Nature Shapes Our Choices. San Francisco, CA: Jossey-Bass.

Maclntyre, Alasdair. 1984. After Virtue. 2nd ed. Notre Dame, IN: University of Notre Dame Press.

Messick, David M. 2004. "Human Nature and Business Ethics." Business Ethics Quarterly, Ruffin Series No. 4 (Special Issue on Business, Science, and Ethics):129-134.

Rasmusen, Eric. 1989. Games and Information: An Introduction to Game Theory. Oxford, U.K.: Basil Blackwell.

Sapolsky, Robert, and Lisa Share. 2004. "The Peacemakers." Economist (17 April):77.

Smith, Adam. 1937. Wealth of Nations. New York: Modern Library (originally published in 1776).

Solomon, Robert C. 1992. "Corporate Roles, Personal Virtues: An Aristotelian Approach to Business Ethics." Business Ethics Quarterly, vol. 2, no. 3 (July):317-339.

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Monkey Business: A Neo-Darwinist Approach to Ethics Codes