Business Ethics and Cognitive Errors Flashcards

A comprehensive collection of 200 vocabulary flashcards covering cognitive errors in ethical reasoning, the foundations and evolution of business ethics, human motivation, and the study of ethical leadership.

Biases

Built-in mental tendencies to perceive and interpret situations in a slanted or prejudiced way.

Heuristics

Mental shortcuts, or rules of thumb, that enable people to make decisions quickly but can sometimes lead to systematic mistakes.

Fallacies

Errors in reasoning that occur when a conclusion does not logically follow from the argument or evidence offered in its defense.

Errors in Perception of Facts

Cognitive errors that distort how information is gathered, taken in, and interpreted based on presentation, source, or prior expectations.

Endowment Effect (Ownership Bias)

The tendency to value an item, project, or resource more simply because it belongs to us, demanding more to part with it than we would pay to acquire it.

Self-Serving Bias

The tendency to attribute personal successes to internal qualities like skill or hard work while blaming failures on external factors like bad luck or unfair conditions.

Context Dependence (Context Effect)

The principle that human perceptions, evaluations, and ethical judgments change depending on the surrounding environment or circumstances.

Halo Effect

A cognitive bias where an overall positive impression of a person or organization spills over into assumptions that they are competent in unrelated areas.

Horns Effect

The reverse of the halo effect, where a single perceived negative trait drags down the overall judgment of an individual across all other areas.

Hindsight Bias

The tendency to believe, after an event has already occurred, that the outcome was obvious, predictable, or known all along.

Classical Economics

An economic framework assuming that individuals are perfectly rational, self-interested agents who consistently make decisions that maximize expected value.

Expected Value

The mathematical average outcome obtained if a choice were repeated many times, calculated by weighting each possible outcome by its probability.

Behavioral Economics

A field integrating psychology with economics to study how humans actually make decisions given limited attention, emotions, and cognitive shortcuts.

Prospect Theory

A behavioral economic theory developed by Daniel Kahneman and Amos Tversky demonstrating that people evaluate outcomes based on subjective value relative to a reference point.

Daniel Kahneman and Amos Tversky

The psychologists who developed Prospect Theory, demonstrating systematic human departures from expected value theory in decision-making.

Subjective Value (Expected Utility)

The perceived personal worth or emotional weight that an individual assigns to an outcome, distinct from its objective mathematical value.

Four Departures of Prospect Theory

The four core ways human decision-making departs from pure rationality: reference dependence, diminishing sensitivity, loss aversion, and probability weighting.

Reference Point

The baseline (typically the status quo or prior expectations) against which individuals evaluate potential outcomes as gains or losses.

Framing via Reference Points

The tactic of influencing decision-making by altering the baseline, such as presenting a corporate decision as saving $200$ jobs versus eliminating $100$ jobs.

Diminishing Sensitivity

The behavioral principle that a given increment of change has a diminishing psychological impact the further one moves from the initial reference point.

Loss Aversion

The cognitive phenomenon where the psychological pain of losing an amount is approximately twice as strong as the pleasure of gaining that exact same amount.

Probability Weighting

The tendency of decision-makers to evaluate risks based on how likely something subjectively feels rather than its actual statistical probability.

Overweighting Small Probabilities

The tendency to treat tiny statistical chances as larger and more impactful than they are, motivating behavior like lottery ticket purchases.

Underweighting Moderate-to-Large Probabilities

The tendency to treat high probabilities as less certain than they actually are, such as treating a $75\%$ failure risk as leaving substantial hope of success.

Conjunctive Event Bias

The tendency to overestimate the likelihood that a series of events will all succeed, overlooking the fact that compound probability decreases with each step.

Disjunctive Event Bias

The tendency to underestimate the probability that at least one of several independent risks or component failures will occur across an entire system.

Redundancy (Backup Systems)

The implementation of duplicate safety controls whose cost is justified by compensating for disjunctive risks across multiple components.

Availability Heuristic

The tendency to estimate the frequency or probability of an event based on how easily vivid, recent, dramatic, or emotional examples come to mind.

Representativeness Heuristic

Judging the probability of an outcome by how closely it resembles a typical mental prototype rather than relying on statistical frequency.

Conjunction Fallacy

The reasoning error of judging that two joint conditions together are more probable than either one of those individual conditions occurring alone.

The Linda Problem

A famous experiment where subjects erroneously judged that Linda being a bank teller and active feminist was more probable than Linda simply being a bank teller.

Anchoring Heuristic

The tendency to rely excessively on the first piece of information encountered when formulating numerical estimates of value, price, or probability.

Confirmation Bias

The habit of seeking out, favoring, and recalling evidence that corroborates preexisting beliefs while actively dismissing or overlooking contradictory facts.

Base Rate Fallacy (Base Rate Neglect)

The cognitive mistake of ignoring general statistical prevalence (the base rate) in favor of case-specific, vivid details when assessing likelihood.

Base Rate

The overall, baseline proportion or statistical frequency with which a condition, trait, or event occurs across an entire population.

Gambler's Fallacy (Maturity of Chances)

The false belief that independent past random occurrences alter future probabilities, assuming that chance must balance out in the short term.

Expectation Bias

The tendency for an observer's prior expectations to distort and color their interpretation of ambiguous information or employee performance.

Blind Reviews

An evaluation practice where names and personal identifiers are removed from documents to neutralize expectation bias and stereotypes.

Structured Rubrics

Pre-established, objective scoring criteria used to evaluate performance consistently before subjective biases can influence judgment.

Overconfidence

The tendency to overestimate one's actual knowledge, capability, predictive accuracy, and personal immunity to ethical lapse.

Causal Fallacies

Errors in reasoning regarding cause-and-effect relationships, such as assuming causation where only coincidence or correlation exists.

Assuming Correlation Between Factors

The error of asserting that two variables are meaningfully linked simply because they happened to be observed together in a small number of instances.

False Causal Attribution (Correlation ≠ Causation)

The mistake of concluding that a confirmed statistical correlation between two variables proves that one factor directly causes the other.

Confounding Variable

An unexamined third variable that is responsible for producing the observed statistical relationship between two correlated factors.

Reverse Causation

A causal error where the true direction of cause and effect is the exact opposite of what the decision-maker assumes.

Post Hoc Ergo Propter Hoc

A Latin causal fallacy ('after this, therefore because of this') assuming that because event B succeeded event A, event A must have caused event B.

Regression to the Mean

The statistical reality that extreme, unusual outcomes are naturally followed by results closer to the historical average, regardless of interventions.

Bad Reasons Fallacy

The mistaken assumption that a conclusion must be completely false simply because the supporting argument provided for it is weak or flawed.

Non-Sequitur

A Latin phrase meaning 'it does not follow,' describing an argument whose conclusion lacks a valid logical connection to its premise.

Irrelevant Conclusion Fallacy

A logical error where presented evidence successfully establishes a valid point, but not the specific conclusion being asserted by the speaker.

Fallacies of Relevance

Arguments that attempt to persuade by introducing extraneous information, emotions, or character attacks that distract from the core issue.

Ad Hominem Fallacy

A fallacy that attacks the speaker's personal background, character, or motives rather than addressing the actual merits of their argument.

Straw Person Fallacy

The practice of misrepresenting, oversimplifying, or exaggerating an opposing position to make it easier to attack and disprove.

Red Herring Fallacy

The tactic of introducing an entirely unrelated topic into a discussion to sidetrack the audience from the primary problem under review.

Appeal to Fear

The use of unsupported threats or alarming hypotheticals to bypass rational critical thinking and pressure people into agreement.

Bandwagon Fallacy (Appeal to Popularity)

The claim that a practice or belief must be correct or acceptable simply because it is popular or widely practiced across an industry.

Appeal to Tradition

Arguing that a course of action is justified or superior merely because an organization has historically always done things that way.

Appeal to Emotion

An attempt to secure agreement by manipulating emotional responses such as pity, pride, guilt, or loyalty in place of valid evidence.

Appeal to Authority

Arguing that an assertion must be true simply because a high-status individual asserted it, especially when they lack expertise in that specific subject.

Appeal from Authority

Dismissing a valid argument or accurate factual claim purely because the speaker lacks formal executive credentials, status, or organizational rank.

Sunk Cost Fallacy

The tendency to persist in an unprofitable or harmful venture because of past unrecoverable investments of money, time, or labor.

Fallacies of Presumption

Errors in reasoning that rest on unexamined, unstated, or unjustified background assumptions that undermine logical validity.

Division Fallacy

The false presumption that whatever is true of a whole system or organization must necessarily apply to each of its constituent parts.

Composition Fallacy

The false presumption that because individual components possess a certain trait, the larger whole they form must also possess that same trait.

False Alternative Fallacy (False Dilemma)

Artificially framing an ethical choice as an absolute either/or proposition between two extremes while ignoring other viable solutions.

Smart Thermostat Sunk Cost Fallacy

In the launch scenario, defending an overheating unit with 'We've come too far to stop now' after spending $18$ months and $\$2\text{ million}$.

Smart Thermostat Probability Error

Calling a $1\text{ in }500$ overheat rate a 'tiny risk,' ignoring that selling $100{,}000$ units would cause roughly $200$ dangerous malfunctions.

Smart Thermostat Division & Halo Error

Assuming an overheating product must be safe merely because the quality engineering team possesses an outstanding general reputation.

Smart Thermostat Bandwagon Error

Dismissing a severe safety hazard by arguing that 'Every competitor launches with a few bugs.'

Smart Thermostat False Dilemma & Fear Error

Coercing a launch approval by falsely claiming: 'Either we launch on schedule, or the company goes under.'

De-biasing the Endowment Effect

Checking ownership bias by asking: 'Would I value this project, budget, or resource the same way if it belonged to another team?'

De-biasing Self-Serving Bias

Checking defensive attributions by asking: 'If this situation had turned out the other way, what would I say caused it?'

De-biasing Hindsight Bias

Recording predictions, factual constraints, and reasoning in writing before project outcomes are known.

De-biasing Confirmation Bias

Actively seeking disconfirming facts by asking: 'What evidence would prove me wrong, and have I honestly searched for it?'

De-biasing Anchoring

Investigating where starting figures originated and consulting neutral, independent benchmarks before negotiating.

Ethics

The systematic study of morality—examining principles of right and wrong, good and bad, justice and injustice.

Ēthos

The ancient Greek word meaning character or custom, historically denoting the habits and dispositions that shape personal conduct.

Descriptive Ethics

The empirical branch of ethics focusing on what individuals, groups, and societies actually believe and practice regarding morality.

Normative Ethics

The philosophical branch of ethics establishing prescriptive moral standards regarding what individuals ought to do and why.

Business Ethics

The study of moral principles guiding commercial behavior, corporate strategy, and decision-making within economic markets.

Investopedia Business Ethics Definition

The moral principles guiding companies and individuals in commerce that extend beyond legal compliance to build market trust and integrity.

Harvard Business School Ethics Definition

The principles that direct organizational decisions, especially within ambiguous gray areas where proper action is not self-evident.

Internal Conduct in Business

The dimension of business ethics governing how a firm interacts with and treats its employees, managers, partners, and shareholders.

External Responsibilities in Business

The dimension of business ethics addressing how an enterprise impacts external stakeholders, consumers, communities, and ecosystems.

Integrity and Fairness Theme

A foundational business ethics principle requiring honesty and justice across commercial relations, marketing, and financial reporting.

Corporate Social Responsibility (CSR)

A business practice balancing commercial profit generation with ecological sustainability and community social welfare.

Accountability and Transparency Theme

An ethical standard prioritizing open disclosure, public reliability, and clear responsibility in organizational governance.

Globalization and Cultural Relativism Theme

The challenge of navigating varying regional cultural expectations and local legal codes while preserving core ethical standards.

Separation Thesis

The contested view that commercial business conduct operates under norms completely distinct from personal ethical values.

Ancient Religious Commercial Codes

Moral traditions found in Christianity, Judaism, Islam, Hinduism, and Confucianism prohibiting fraud, usury, and commercial exploitation.

Early 1900s Business Ethics Curriculum

The emergence of ethics in early U.S. business schools responding to rapid industrialization, labor exploitation, and monopolies.

1970s Business Ethics Movement

The period marked by widespread corporate adoption of formal ethical codes and compliance offices amid consumer and environmental movements.

1980s Business Ethics Institutionalization

The formal embedding of business ethics into standard American business curricula in response to major insider trading and fraud scandals.

Post-2008 Ethics Expansion

The renewed integration of ethics into leadership and risk management following systemic corporate failures and the 2008 financial crisis.

Stakeholder Capitalism

A corporate governance philosophy evaluating corporate success by value created for workers, consumers, and communities alongside shareholders.

Culture-Based Ethics vs. Compliance-Based Ethics

The insight that sustainable business integrity requires deeply embedded organizational values rather than bare legal rule compliance.

Honest Marketing and Advertising

A foundational ethical expectation in commerce prohibiting deceptive promotions, false product performance claims, and hidden charges.

Financial Responsibility

The moral duty to maintain transparent bookkeeping, accurate audit disclosures, anti-fraud controls, and full tax compliance.

Fair Labor Practices

The corporate duty to ensure safe working conditions, fair pay, reasonable work hours, and workplace freedom from harassment.

Moral Awareness (Ethical Sensitivity)

The learned cognitive ability to recognize that an organizational problem contains moral values, stakeholders, and potential harms.