There are several challenges that can make ethical behavior difficult. The first of these is overconfidence. Most people believe they are more ethical than average, even though this cannot be true in aggregate. Overconfidence can lead to faulty decision-making, and a failure to consider all of the relevant inputs to analyze a situation.
A second challenge are situational influences, or the behavior of others around us. People tend to conform to societal pressures, and accept as moral the prevailing way of doing business. In the financial industry, a major situational influence is money. Large bonuses and other financial rewards can induce otherwise honest people to act in ways others may find unethical. It can be easier to perceive the short-term benefits of an action than the long-term harm that might ensue from reputational damage.
Situational influences can also have a positive effect on ethical behavior. If upper management at a firm reinforces ethical culture and the importance of proper behavior, it can be easier for each individual to act ethically. However, care should be taken not to allow compliance to become a “check-the-box” activity. Each situation creates different challenges, and a thoughtful approach to the facts of the situation will help ensure ethical behavior.
This post addresses a learning outcome in “Ethics and Trust in the Investment Profession,” which is part of the curriculum for the CFA Program.