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Business Finance

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please respond to the following items/questions:
1) What was your favorite topic or issue that we covered in this class? Why? What made it interesting to you?
2) What was your least favorite topic or issue that we covered in this class? Why? What made it uninteresting for you?

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Is Business Bluffing Ethical? Albert Carr • Private morality is based on a respect for the truth. – Therefore, we should respect a business person the closer he/she adheres to the truth. • However, most bluffing in business can be regarded as game strategy—like bluffing in poker. – Therefore, bluffing in business does NOT reflect on the morality of the bluffer. • Henry Taylor, a British diplomat, once said: “Falsehood ceases to be falsehood when it is understood on all sides that the truth is not expected to be spoken.” – This describes exactly bluffing in poker, diplomacy, and in business. Deception in Business • Corporate executives are often compelled—in the interests of the company or themselves—to practice some form of deception when negotiating with customers, suppliers, unions, or government. • Through conscious misstatements, concealment of facts, or exaggerations—in other words, through bluffing—they seek to persuade other parties to agree with them. • If a business executive refused to bluff and always told the entire truth, he/she would be ignoring opportunities permitted under the rules of the business game—and would therefore be at a heavy disadvantage. The Business Game • Business—as practiced by individuals and corporations—has the character of an impersonal game. • The business game has its own special rules, strategy, & ethics. • Consider some examples: • Example 1: A student graduates with honors from Cornell University, and applies for a job with a large corporation. • As a job candidate, he must take a psychological test that asks: – “Which of the following magazines have you read regularly or from time to time? Time, Fortune, Life, New Republic, Newsweek, Ramparts, National Review, Business Week, The Nation, Playboy, Sports Illustrated” • Even though the candidate often looks at Playboy, and subscribes to The Nation and Ramparts, he does not check any of these. • He wasn’t sure whether Playboy would hurt him, but worried that being a reader of The Nation and Ramparts would make he seem too liberal or radical. • So, he checks a couple of the more conservative magazines. • The candidate later receives a job offer. • The candidate’s action is consistent with the rules and ethics of the business game. • Example 2: A 58-year old man suddenly finds himself unemployed, due to a corporate merger & elimination of his position. • The man is in good health, has lots of energy, with grey hair the only sign of his age. • He decides to dye his hair, and he & his wife agree that he can pass for 45-years old. • The man lists age 45 on his resume and begins to apply for new jobs. • The man’s action is consistent with the rules and ethics of the business game. The Poker Analogy • Consider the game of Poker: • The game involves some element of chance or luck. • However, the eventual winner is usually the person who plays with skill over the long-run. • Success involves intimate knowledge of the rules, insight into the psychology of other players, putting on a bold face, exercising self-discipline, and responding quickly & efficiently to opportunities presented by chance. • Furthermore, we don’t play Poker according to our rules of private morality. • For example, it is perfectly acceptable to bluff a friend who has a better hand, and strip him of the rest of his chips. • The friend is the one who is expected to defend himself. • Poker operates according to its own special rules or ethic. • Ordinary private morality may call for trust of others, value claims of friendship, and emphasize being kind and openhearted. • The game of Poker, by contrast, calls for distrust of others, ignores claims of friendship, and treats deception & concealment of one’s strengths as vitally important. • However, this does NOT mean the game of Poker has no rules. • For example, the rules of Poker forbid cheating, such as keeping an Ace up your sleeve or marking the cards. • Business is like Poker: – It is a game of strategy. – It does not operate according to the rules of private morality. – Instead, it operates according to its own special rules or ethic. • The rules of business are the law. – As long as corporate executives & other business people comply with the letter of the law, they may do as they see fit. – Business people regularly violate the rules of private morality, but often these are not violations of the rules of business. The Illusion of Business Ethics • The illusion that business people can afford to be guided by private morality is often fostered by speeches, articles, & so forth. • Business people will sometimes say things such as “It pays to be ethical” or “Sound ethics is good business.” • However, these statements are actually just a selfserving calculation. • These statements simply mean that, in the long-run, an individual or company will make more money if it does not provoke hostility from competitors, suppliers, employees, & customers by squeezing them too hard. • In other words, statements about “business ethics” are really statements of game strategy, not of ethics. “A Stakeholder Theory of the Modern Corporation” R. Edward Freeman Stockholder Theory • The central question in the CSR debate is this: In whose interest and for whose benefit should the corporation be managed? • Stockholder Theory answers this question by appealing to the assumption of “stockholder primacy.” • This assumption holds that since stockholders own shares in the firm, management has a duty to give precedence to the rights and interests of stockholders over the rights and interests of others. • Essentially, Stockholder Theory holds that in return for the right to control the firm, management should vigorously pursue the interests of stockholders. • And that means management should pursue transactions with suppliers, employees, customers, and others in an unconstrained manner, with the only goal being pursuit of the stockholders’ interests. • Freeman argues that Stockholder Theory, and its assumption of “stockholder primacy,” is wrong. • Instead, he argues in favor of Stakeholder Theory. • Stakeholder Theory holds that corporate management has a duty to pursue the interests of all stakeholders in the firm. • “Stakeholders” are those groups who have a stake in, or claim on, the firm. • These groups include suppliers, customers, employees, management, stockholders, and the local community. Arguments for Stockholder Theory • The Legal Argument: • The law states that corporations: – Are legal entities that exist as a “legal person” – Have limited liability for their actions – Have immortality (since their existence transcends that of its members). • The law also states that management: – Has a duty to conduct the affairs of the corporation in the best interest of the stockholders. • Furthermore, the law allows stockholders to sue management if management fails to carry out this duty. • Therefore, management should act to maximize stockholders’ profits. • Objection: • The problem with this argument is that it appeals to the law to justify Stockholder Theory, but overlooks developments in the law that have occurred during the past century. • The law has actually developed in ways that require the claims of customers, employees, and communities to be taken into consideration. • The interests of customers have been given some priority through the development of product liability law. • The law has essential changed from a policy of “buyer beware” to a policy of “seller beware.” • The Consumer Product Safety Commission (CPSC) has been created and given the power to enact product recalls. • In 1980, the CPSC actually required one automobile manufacturer to recall more cars than it built that year! • The interests of employees have been given some priority through various pieces of legislation. • The National Labor Relations Act (1935) gave employees the right to unionize and engage in collective bargaining. • The Equal Pay Act (1963) and Civil Rights Act (1964) forbid management to discriminate against women and minorities when it comes to pay and hiring practices. • The Age Discrimination in Employment Act (1967) forbids management from discriminating in pay and hiring when it comes to age. • The interests of communities have also been given some priority through various pieces of legislation. • The Clean Air Act (1963) and the Clean Water Act (1972) constrain the degree to which management can pollute the air and water. • So the Legal Argument fails, because it looks at only one aspect of law, while ignoring others parts of the law that give priority to the rights and interests of other stakeholders besides the stockholders. • The Economic Argument: • Free markets create the greatest good through the “invisible hand,” and thus governments should not intervene (Adam Smith’s argument). • So governments should not interfere in the market by creating legislation that requires management to give priority to the rights and interests of other stakeholders. • Therefore, the greatest good will be realized in a free-market economy where management acts to maximize stockholders’ profits. • Objections: • The problem with this argument is that it claims free, unregulated markets create the greatest good, but historical experience has shown this to be false. • First, free markets are plagued by the problem of externalities (exemplified by the “tragedy of the commons”), which occur when economic transactions have a cost for non-consenting bystanders. • Firms seek to internalize the benefits and externalize the costs of their actions. • For example, no one has an incentive to incur the cost of non-pollution, and since every firm reasons in that way, the result is polluted air and water. • http://www.youtube.com/watch?v=aCGTD5Bn1m0 • Second, free markets are plagued by the problem of moral hazard, which occurs when the purchaser of a good is willing to take a risk, because the costs of that risk can be passed along to others. • This means there is no incentive to economize on the part of either the producer or the consumer, which results in excessive use of the resources involved. • For example, the recent Wall Street bail-out or the Russia bail-out in 1998. • Third, free markets are plagued by the problem of monopolies, which occur when a single entity is the only supplier of a particular commodity. • This occurs because each firm is seeking to monopolize a small portion of the market and not compete with one another. • Monopolies result in reduced competitiveness and allow for abuses, such as monopoly pricing. • In order to avoid these negative effects of the free market, we have introduced government regulation in an attempt to create an economy that produces the greatest good. • And part of that regulation includes requirements that management give priority to the interests of other stakeholders (over the interests of stockholders). Stakeholder Theory • “Stakeholders” are groups or individuals who benefit from or are harmed by corporate actions. • We can divide stakeholders into two categories: • 1) “Narrow stakeholders” are those who are vital to the survival and success of the corporation. – These include suppliers, customers, employees, management, stockholders, and the local community. • 2) “Broad stakeholders” include anyone who can affect or is affected by the corporation. • Stakeholder Theory holds that each of the Narrow Stakeholder groups has a right not to be treated as a means to an end (Kantian theory). • Therefore, Narrow Stakeholders must be able to participate in determining the future direction of the firm in which they have a stake. • Stockholders (owners) have financial stakes in the firm in the form of stocks, bonds, etc. • Therefore, they have a right to expect some kind of financial return on this investment. • Employees have their jobs, and usually their livelihoods at stake. • Employees are expected to give their labor and loyalty to the firm. • Therefore, they have a right to wages, benefits, and meaningful work. • Additionally, the firm is expected to provide for them and carry them through difficult times. • Suppliers depend on the firm as a customer, and thus suppliers may have their success and survival at stake. • Suppliers contribute raw materials to the firm, which determine the quality and price of the firm’s final products, and may respond when the firm is in need. – Example: Chrysler’s suppliers cut prices and accepted late payment and financing when Chrysler was on the brink of failing. • Therefore, suppliers have a right to be treated as valued members of the stakeholder network. • Customers depend on the firm to meet some of their needs, and thus have a stake in continuing to have these needs met. • Customers buy the products and services of the firm, which provides the lifeblood of the firm in the form of revenue. • Re-investment of revenue in R&D also means that customers indirectly benefit from the development of new products and services. • Therefore, customers have a right to receive benefits from the products and services that they purchase, and that the firm pay attention to their needs. • The local community benefits from the tax base and economic and social contributions of the firm, and thus has its prosperity at stake. • The local community gives the firm the right to build facilities and operate there, and also provides the firm with local services (fire, police, road crews, etc.). • Therefore, the local community has a right to expect the firm to be a good citizen, and not to expose the community to hazards in the form of pollution, toxic waste, etc. • Also, if the firm intends to leave, it has an obligation to work with the local community to make the transition as easy as possible. • Management has a special position because: – (a) It is a stakeholder – (b) It also has the role of looking after the other stakeholders. • Like employees, management has their jobs (and perhaps livelihoods) at stake. • Management is expected to give their labor and loyalty to the firm. • Therefore, they have a right to wages, benefits, & meaningful work. • But management is also expected to look after the firm, which involves balancing the multiple claims of conflicting stakeholders. • Unlike Stockholder Theory, which gives primacy to stockholders, Stakeholder Theory does NOT give primacy to any one group of stakeholders over others. • Thus, according to Stakeholder Theory, management must keep the relationships among the various stakeholders in balance. 3 Principles of Stakeholder Theory • 1) Stakeholder Enabling Principle: A corporation shall be managed in the interests of its stakeholders, defined as employees, owners (stockholders), mangers, customers, suppliers, & community. • 2) Principle of Management Responsibility: Managers of the corporation shall have a duty of care to use reasonable judgment to define and direct the corporation in accordance with the Stakeholder Enabling Principle. • 3) Principle of Stakeholder Recourse: Stakeholders may bring an action against management for failure to perform the required duty of care. A Simplified Account of Kant’s Ethics Onora O’Neill The Basis of Kant’s Ethics • For Kant rationality has ultimate value, and this provides the basis for morality. • Rationality allows a being to have autonomy: the ability to choose, make plans, and to formulate and act upon principles. • Since human beings are the bearers of rationality, human life is of ultimate value, and should never be sacrificed for anything of lesser value. Kant’s Ethics • Kant Believes there is one supreme principle of morality from which all the other particular moral principles can be derived. • He calls this supreme principle the “Categorical Imperative” (CI). • The Categorical Imperative has a few different formulations. • According to Kant, these formulations are logically equivalent, which is why they are all formulations of the same principle. • We will focus on two formulations of the CI. Formula of Universal Law • The first formulation of the Categorical Imperative is called the “Formula of Universal Law.” • This formula states: “Act only on that maxim (principle) which you can will to be universal law.” • Every time we act, Kant believes that our action reflects some principle upon which the action is based. • The morality of an action should be determined by the principle on which it is based (NOT by the consequences the action will produce). • This formula provides a two-step process for determining whether an action is moral: • 1) Identify the principle upon which the action is based. • 2) Determine whether or not you could will that principle to be a universal law that everyone follows at all times. Examples • Example 1: A woman finds herself in a situation where she desperately needs to borrow money. In order to get the money, she must promise to repay a loan that she knows she will never be able to repay. • Principle: When I find myself in need of money, I will borrow money and promise to repay it, although I know that I cannot. (Lyingpromise) • Universal Law?: If this principle were a universal law, then promises would become impossible because no one would believe them. • Thus, we cannot will this principle to be a universal law, because it is selfcontradictory and undermines itself. • Example 2: A rich and prosperous man sees a person who is poor and desperately in need of help. He considers whether to ignore this person and not be troubled with him. • Principle: If I see someone in need, I will not trouble myself to assist or contribute to the welfare of that person. • Universal Law?: There will be occasions in life when I need help because we humans are dependent creatures. If this principle were a universal law, then this would deprive me of any help from others. • Thus, we cannot will this principle to be a universal law, because it is selfcontradictory given the type of creatures that we are. Formula of the End in Itself • The second formulation of the Categorical Imperative is called the “Formula of the End in Itself.” • This formula state: “Act in such a way that you always treat humanity (whether yourself or another person), never simply as a means, but always at the same time as an end.” • This formula states that we should never act on principles that treat a person only as a means, and should always act on principles that also treat a person as an end. • To understand this formula, we need to know what it means to treat a person as a “means” and as an “end.” Treating a Person as a Means • To treat someone as a means, is to use the person as an instrument to achieve my goals. • To treat someone only as a means, is to involve the person in a scheme of action to which he/she could not in principle consent. • Consider some examples: • Example 1: I go to the bank to cash a check. I use the bank teller to get the cash. The bank teller uses me to earn a living. • In this case, both parties treat each other as a means (to each get something they want). • However, since each party consents to the transaction, we have NOT treated each other only as a means. • Each person assumes: • i) the other party has principles of his/her own that are being acted upon. • ii) the other party is NOT a mere thing to be manipulated. • This example shows that it is not wrong to treat another person as a means; we do this all the time. • Example 2: I go to the bank to get a loan. In order to get this loan, I make a promise to the loan officer to repay it, knowing that I will never be able to do this. I use the loan officer to get the loan. The loan officer uses me to earn a living. • In this case, both parties treat each other as a means (to get something they want). • However, I have also deceived the loan officer by making a false-promise (a lie). • This means the loan officer is unaware of the true principle underlying my action, and is therefore unable to consent to my course of action. • If the loan officer was aware of my true principle of action, then she would not consent to my course of action. • Since the loan officer is unable to consent to my course of action, I have used her only as a means. • In other words, I have manipulated the loan officer—as if she were only an instrument or a tool—in order to get what I want. Two Standard Ways of Using a Person Only as a Means • 1) Deceit: misleading, lying, tricking, or dealing fraudulently with another person, so that he/she is unable to consent to the true course of action. • 2) Coercion: threatening or forcing another person to do something, so the person is not consenting to what I am making him/her do. Treating a Person as an End • To treat someone as an end is to: • i) Never treat the person only as a means • ii) Sometimes seek to promote the person’s plans and principles by sharing some of his goals. • When we treat someone as an end, we try to achieve when that person wants. • However, it is impossible to achieve everything that others want, because their goals are too: • numerous—they want so many things it would be impossible for me to help achieve all of them. • diverse—they want things that I am not in a position to help them achieve. • incompatible—they want things that conflict and cannot all be achieved. • Therefore, we will have to be selective about which goals we try to help others achieve. Moral Duties • This framework yields two types of moral duties: • 1) Duties of Justice—require that we do NOT act on principles that treat others only as a means. • Since this type of duty involves things we should never do, they remain constant at all times. • For example, we should never deceive or coerce another person. • 2) Duties of Beneficence—require that we act on some principles that advance others as an end. • Since these duties involve things that we must sometimes do, they are not constant and require discretion. • For example, we must sometimes give charitably to a person who is in need. Duties and the Basis of Kant’s Ethics • Recall that for Kant, rationality has ultimate value, and provides the basis of morality. • Rationality is of such value that it should never be sacrificed for something of lesser value. • This means no rational being (human) should be sacrificed for something of lesser value. • Therefore, no human should be treated only as a means for the enjoyment or happiness of another. • This explains why it is wrong to deceive or coerce another person into scheme of action to which that person would not consent. • Doing so fails to treat the other person as a rational being who possesses autonomy: the ability to choose, make plans, and formulate and act upon principles. The Ethics of Whistleblowing Major Whistleblower Cases • In 2002, Time Magazine chose three whistleblowers as its “Persons of the Year.” • Two of the three were corporate whistleblowers, who exposed two of the biggest corporate scandals in U.S. history: WorldCom and Enron. • WorldCom • WorldCom was the second largest telecommunications company (after AT&T) in the United States. • Cynthia Cooper was Vice President of Internal Audit at WorldCom. • Cooper began to discover suspicious entries in the company’s books. • In 2002, Cooper and her staff began doing a series of mini-audits—often late at night & on weekends—to investigate these entries. • The investigation ultimately led to the discovery of $3.8 billion in fraudulent accounting entries, as well as a questionable $400 million loan to the CEO Bernie Ebbers. • Cooper took her findings to the audit committee of WorldCom’s board of directors, because her superiors, CEO Ebbers and CFO Scott Sullivan, were deeply implicated. • Sullivan retaliated, asking Cooper to stay out of these matters. • However, the audit committee of the board took action and contacted the SEC. • After the SEC investigated WorldCom: – Ebbers was found guilty of conspiracy & securities fraud – Sullivan was found guilty of filing false reports & securities fraud. – In 2002, WorldCom filed for bankruptcy, which was the biggest bankruptcy in U.S. history up to that time. • Wells Fargo • Wells Fargo is currently involved in an account fraud scandal, which involved opening millions of savings & checking accounts for customers without their consent. • The scandal first erupted in 2016. • However, Jessie Guitron, a Wells Fargo bank employee, had attempted to bring the issue to the company’s attention seven years earlier in 2009. • In 2010, the company retaliated & fired her. • Guitron was unable to find another bank that would hire her. • https://www.cbsnews.com/video/wells-fargowhistleblower-on-fraudulent-banking-practices/ What is a Whistleblower? • A whistleblower: • (i) is a member of an organization • (ii) who releases information outside the normal chain of command or channels of communication • (iii) that shows evidence of significant misconduct on the part of the organization or its members. DeGeorge’s Criteria for Whistleblowing • Permissive Whistleblowing: • 1) The harm that will be done to the public by the product or company action is serious and considerable. • 2) The employee has made the concerns known to his/her supervisor. • 3) If the supervisor has taken no actions, the employee exhausts complaint mechanisms within the organization. • Mandatory Whistleblowing: • 4) The employee has documented evidence that would convince an impartial observer that the organization is doing wrong. • 5) There is strong evidence that making the information public will prevent the harm. Ethical Analysis of Whistleblowing • Why is whistleblowing potentially problematic? • It involves weighing the values of: • (i) Loyalty • (ii) The agent-principal relationship • (iii) Avoiding retaliation • Against the value of: • (iii) Making corruption publicly known • Loyalty • Loyalty is a virtue that involves giving strong support or allegiance to a person or institution, even when the commitment is costly. • It is generally held that employees owe loyalty to their employer. • However, cases of potential whistleblowing involve the employer acting wrongfully, and the employee being either (i) involved in the wrongful acts, or (ii) aware of the wrongful acts. • If the employee takes part in the acts, she can be accused of doing wrong. • If the employee is simply aware of the acts, she can be accused of silent complicity. • This raises the following question: Can a person act virtuously when doing a wrongful act? • Bill Maher example: Did the 9/11 terrorists act bravely? – https://www.youtube.com/watch?v=JhZNqtJVBy0 • Ancient ethicists (such as Plato & Aristotle) believed in the “unity of the virtues.” • This view holds that in order to embody any of the virtues, a person must have mastered them all. – In other words, if a person has any of the virtues, then the person has all of the virtues. • This implies that if a person is brave, then he will also be just. • However, we might object that even if the 9/11 terrorists acted bravely, but they did not act justly. • Modern ethicists tend to reject the “unity of the virtues.” • Instead, they believe in the “modular view” of the virtues. • This view holds that a person can possess some virtues without possessing all of the virtues. – A person can be brave, without being just. • Back to whistleblowing: Is an employee being loyal if she commits, or is silently complicit in, wrongful acts for her employer? • The “unity of the virtues” view holds that if a person acts wrongfully, the person is not acting virtuously. – Therefore, if the employee remains silent about the employer’s misconduct, this is NOT an act of loyalty. • The “modular view” holds that a person can act wrongfully, while still exhibiting a virtue. – Therefore, if the employee remains silent about the employer’s misconduct, this can be an act of loyalty. • Since modern ethicists tend to hold the “modular view,” perhaps loyalty can obligate an employee to remain silent. • A further issue: What does “loyalty” mean? • 1) Loyalty involves merely following orders and not causing problems. • Whistleblowers are disloyal employees. • 2) Loyalty involves a commitment to the true interests or goals of the organization. • Whistleblowers may be extremely loyal employees. • Studies have suggested that whistleblowers are often very loyal to their organizations: – They have long histories of successful employment – They are not alienated & not active members of movements advocating major social changes – They began as firm believers in their organizations – They naively believed that if they took a grievance to superiors, there would be an appropriate response – They found that their earlier service & dedication provided little protection against charges of undermining organizational morale & effectiveness • This suggests that at least from the perspective of actual whistleblowers, they believe themselves committed to the true interests or goals of the organization. • Agent-Principal Relationship • The employee and employer are in an agentprincipal relationship. • The primary ethical obligations of an agent are to: – (i) work as directed – (ii) perform tasks with compliance & care – (iii) act in the interest of the principal in all matters within this role • When an employee becomes a whistleblower, she seems to violate (i) and perhaps also (iii). • However, the agent-principal relationship falls within one domain of business ethics: The Ethics of Relationships & Firms. • There is another domain of business ethics: Market Ethics. • The most important obligations of market ethics are: – (i) Observing agreements & contracts – (ii) Avoiding force & fraud (deception & manipulation) • While an agent has obligations to the principal, these obligations do not extend to violating the other domain of business ethics: market ethics • If an employer is directing an employee to be complicit in activities that defraud customers, this is a violation of market ethics. • However, the agent-principal relationship has limits: – The agent has an obligation to act as directed (and in the interest of the principal) – These obligations do not extend to violating market ethics. • Therefore, the obligations of the agent-principal relationship do not obligate an employee to remain silent about fraudulent conduct. • Avoiding Retaliation • Retaliation against whistleblowers is extremely common. • This can include poor evaluations, demotion, or being fired. • It is also common for whistleblowers to be “blacklisted,” so they cannot obtain jobs in the same industry. • Whistleblowers often suffer career disruption & financial hardship due to job dislocation & legal expenses. • There is also severe emotional strain on whistleblowers & their families, as coworkers, friends, & neighbors may turn against them. • Making Corruption Publicly Known • Whistleblowing attempts to making wrongful acts publicly known. • The value of this is fairly obvious: – Ideally, it puts an end to the wrongful action, and the victims may receive compensation for the wrong done to them. Utilitarianism & Deontology • The issue of whistleblowing involves four values: loyalty, the agent-principal relationship, avoiding retaliation, & making corruption publicly know. • Which of the previous consideration is most important to Utilitarianism? • Avoiding retaliation • Making corruption publicly known • Which of the considerations is most important to Deontology? • Loyalty • Agent-principal relationship DeGeorge’s Criteria Revisited • • • Permissive Whistleblowing: 1) The harm that will be done to the public by the product or company action is serious and considerable. Consequences • • 2) The employee has made the concerns known to his/her supervisor. Loyalty/Duty • 3) If the supervisor has taken no actions, the employee exhausts complaint mechanisms within the organization. Loyalty/Duty • • • • Mandatory Whistleblowing: 4) The employee has documented evidence that would convince an impartial observer that the organization is doing wrong. Loyalty/Duty = Employer; Consequences = Action will succeed • • 5) There is strong evidence that making the information public will prevent the harm. Consequences Truth & Deception in Advertising Case Study: Selling Hope • In 1986, a billboard was displayed in an economically depressed community on the west side of Chicago. • The billboard read: “Your way out.” • It was an advertisement for the Illinois state lottery. • While most lottery advertisements are less blunt, the industry commonly relies on the theme of a life-changing event in its advertising. • In reality, lotteries are a cruel disappointment to all but a few lucky winners. • 44 (of the 50) states, plus D.C., have lotteries. • Lotteries are big business: – In 2008, they brought in nearly $53 billion in revenues. – They have an average payout of 61%, which means states were left with about $18 billion (after expenses). • Lottery marketing: – Lotteries spend about $400 million annually on marketing. – Since lotteries are monopolies with no competitors, their advertising does NOT have the traditional aim of attracting customers away from competing brands. – The goal of lottery advertising is to (i) recruit new players, and (ii) encourage existing players to increase their activity. – Most of the advertising is focused on the second objective, encouraging players to play more games and spend more on each one. • Lottery marketing begins with the development of a product mix, because different games appeal to different players – Variations include number & size of payouts, degree of complexity, and timeframe (instant scratch, daily numbers, weekly drawings, etc.). – Focus groups, surveys, and other research are used to determine peoples’ preferences and responses to proposed games. • Marketing campaigns are further developed by identifying which demographics groups are most likely to play and which games appeal to these groups. – For example, research shows that among Latin Americans, African Americans and whites, African Americans are mostly likely to play, whites second most likely, and Latin Americans least likely. – Men play more than women. – Playing increases with age. – Playing is correlated with less education and lower income. • Is the Illinois Lottery billboard a case of deceptive advertising? • Lottery advertising has often been criticized for being deceptive: – 1) Ads highlight the maximum award, but seldom disclose the odds of winning. • For example, a CT ad correctly listed the odds of winning something, which were 1 in 30, but not the odds of winning the prominently displayed jackpot prize (which were 1 in 13 million). – 2) The advertised jackpot prize will be much less after taxes, and may be split among multiple winners. – 3) Psychological research shows that people’s perceptions of probability are increased by tangible examples of successful outcomes. • For this reason, ads often counter awareness of the long odds by including profiles of previous winners and using slogans like “Every single second, someone is cashing a winning ticket.” Marketing & Advertising • Marketing is an essential function of any business. – The purpose of a business is to create and keep a customer. – In order to do this, a business must develop products & services that customers want at prices they are willing to pay. • However, marketing is also an area of conflict in the market place: – Marketers have strong incentive to sell products and have powerful means for doing so. – Consumers are vulnerable to the vast power of companies to determine what goods are offered, and through advertising, what consumers want. • Advertising is the aspect of marketing that involves persuading/influencing people to buy. • Advertising can have negative aspects: – It pervades our lives and can be irritating or offensive. • However, there also benefits provided by advertising: – It provides us with information about products. – It boosts the economy as a whole (1 to 2% of GNP is spent on advertising). • Furthermore, companies that sell products & services regard advertising as a valuable and indispensable marketing tool. • For these reasons, advertising is both a significant & an essential part of doing business. Deception & Manipulation • Like sales, advertising can involve deception and manipulation. • Deception occurs when a customer is led to have a false belief about a product. – Examples: markdown from a “suggested retail price” that is never changed, “introductory offers” that falsely claim to offer savings, “special sales” that end today (and the same sale starts again tomorrow), misleading pictures, etc. • Manipulation consists in taking advantage of the customer’s psychology to make a sale. – Examples: “Bait & switch” (luring customers into a store with a low-priced item that is unavailable or of horrible quality, and then selling a high-priced item), taking advantage a vulnerable buyer such as a child, etc. Complaints and Regulation of Advertising • There are many complaints against advertising: – Outright falsehoods – Exaggerated claims – Offensive/Bad taste (e.g. excessive use of sex & violence, negative stereotypes about certain groups, etc.) – Irritating repetition – Targeting children (e.g. alcohol, tobacco, etc.) – Concerns about behavior control • These complaints have led to demands for government regulation & industry selfregulation: – Deceptive advertising is subject to regulation by the Federal Trade Commission (as are deceptive sales practices) – The American Association of Advertising Agencies has adopted a code of ethics that addresses issues concerning fairness & good taste Deceptive Advertising • A deceptive ad is one that has a tendency to deceive • Deceptiveness can depend not only on the truth or falsity of the claims, but also on the impact of the ad on those who see or hear it: • It is possible for an ad to contain false claims, but not be deceptive. • A hair restorer offers an ad with patently false claims, but it fails to deceive anyone. • Every razor blade is advertised as giving the closest, most comfortable shave; every tire is advertised as giving the smoothest, safest ride, etc. (this is usually considered harmless) • It is possible for an ad to be deceptive, but not contain any false claims. • In 1973, Anacin offered an ad that claimed it has a unique painkilling formula that is superior to other non-prescription analgesics. • Anacin contains only aspirin & caffeine. • Aspirin is unique (in the sense that all chemical compounds are different from each other), and it was the best non-prescription pain reliever at the time. (Both claims are true.) • However, the ad is deceptive because it misleadingly implies that Anacin is superior to other pain relievers that also contain aspirin. • A key issue is whether there is any evidence to support an advertising claim: – The Federal Trade Commission has regularly imposed an evidence standard: • In 2014, a L’Oreal advertisement claimed that its skincare product would “boost genes activity and stimulate the production of youth proteins.” • The FTC held that this gave consumers the impression that there were unique scientific properties of the skincare product, but there is no evidence to support this claim. • Thus, the FTC found that L’Oreal had engaged in deceptive advertising. • However, while evidence is a key issue, it has proven difficult to offer an adequate definition of deceptive advertising. – Marketing theorists have not successfully defined deception in advertising. – The FTC has not offered a precise legal definition of deceptive advertising (only general features). • Without a clear definition, it is difficult to understand the ethical issues involved and to enforce legal prohibitions against deceptive advertising. • Crucial questions for an adequate definition of deceptive advertising: • 1) Is deception due to the ad or to the consumer? (Is an ad deceptive if it deceives a few ignorant consumers, or only if it deceives many reasonable consumers?) • In the 1940’s, Clairol advertised a dye that will “color hair permanently.” • A few ignorant people failed to realize you would still need to dye new hair growth. • However, the FTC used an ignorant consumer standard & found this claim was deceptive. • 2) Is an ad deceptive if it does not create a false belief, but simply takes advantage of people’s ignorance? • Some brands of peanut butter advertise their product as “cholesterol-free” • However, cholesterol is only present in animals fats, not plant fats. So no peanut butter contains cholesterol. • While the ad contains no false claims, it plays on consumer’s ignorance and leads them to believe the product is healthy. Case Study: Campbell Soup Ads • In 1970, Campbell Soup ran a TV ad showing a bowl of vegetable soup that appeared chocked full of solids. • This effect was achieved by placing a bunch of marbles on the bottom of the bowl, which held the solids near the surface. • The FTC began an investigation, and ultimately Campbell’s agreed not to use the technique again. • But how does this differ from an ad for iced tea, which shows the tea in a glass with plastic ice cubes? • In both cases, false beliefs are created in the consumer’s mind. • The difference between the ads seems to be this: – In the case of the iced tea ad, the false belief created by the plastic ice cubes will have no bearing on a decision to purchase the tea. – In the case of the Campbell Soup ad, the false belief created by the marbles can definitely have an influence on the decision to buy the soup. • In 1991, Campbell Soup ran an ad that stressed the low-fat, low-cholesterol content of some of its soups, and linked these qualities to a reduced risk of heart disease. • The soups do have reduced amounts of fat and cholesterol, but the ad failed to mention the soups are high in sodium, which increases the risk of some forms of heart disease. • Once again, the FTC conducted an investigation: – They charged Campbell with implying that its soups could be part of a healthy diet that reduces heart disease, while failing to state that they contain high sodium which should be avoided by people concerned about heart disease. • Campbell agreed to withdraw the health claim, and to disclose the amount of sodium in its ads. • Is this Campbell Soup ad deceptive advertising? • It will likely have different affects on different consumers: – Consumers who are unaware of the sodium content of canned soups might purchase these soups as part of a diet aimed at reducing the risk of heart disease. • Indeed, these soups are better & help to avoid heart disease in comparison to soups that are high in fat & cholesterol. – Consumers who are health-conscious and aware of the high sodium content in canned soup would likely make a different, more rational consumer choice. • This ad does not directly create a false belief in any consumer. – However, the ad’s success depends on taking advantage of consumer ignorance about the sodium content of canned soup & its link to heart disease. • Did Campbell have an ethical obligation to disclose the sodium content of its soups? • One strong reason for thinking Campbell has an obligation: – (i) The ad led people concerned about heart disease to buy its product. • There are two additional reasons why Campbell may have an ethical obligation to disclose, which relate to consumers making a rational choice: – (ii) The sodium content of the soup cannot be easily verified by customers (unlike the amount of vegetable solids in the soup). – (iii) The decisions consumers make to protect their health are of great importance. (This is somewhat similar to disclosure of safety information when risk of physical injury is possible.)
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Running Head: FAVOURITE AND LEAST FAVOURITE TOPICS COVERED IN CLASS

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FAVOURITE AND LEAST FAVOURITE TOPICS COVERED IN CLASS
My Favorite Topic: Truth and Deception in Advertising
This was my most interesting topic among all the topics we studied for this class. I found
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Thetopic shed light on how most advertisements give people false hopes by touching on are...


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