Unethical Behavior Theory
Why we need to follow our Laws and Religion
It is human nature to do whatever is best for oneself, and it is completely logical to do so, but
those decisions lead to selection of a scenario which is not the most favorable to everybody who
is affected by those decisions.
Professor Anmol Moonat
Nash Equilibrium: A stable state of a system that involves several interacting participants in which no participant can gain
by a change of strategy as long as all the other participants remain unchanged (Princeton University).
Simply, it is the scenario you would choose to maximize your benefits when you know what choices other members who
are part of the game have. However, you do not know which choice the other members will select.
Let us consider a self-benefit driven society. A world that is free of religion and laws, where every individual tries to
maximize his benefit from the choices he makes.
Every individual in this society will select the profit maximizing choice, and the society will be in Nash Equilibrium.
It may seem that selection of the benefit maximizing output by every individual would result in the benefit of the society
being maximized, but in reality, it is not so. Nash Equilibrium is not a globally optimal state.
Laws and restrictions can limit the ability of members of the society to choose their best choice, and can increase the
benefits of these members as well as the society.
This is proved in the example that follows…
Consider the case of lobbying by government officials, in which they place orders on behalf of the government only to
those companies which bribe them.
Let us assume, for the sake of simplicity, that there are only 2 companies: A and B. Both A and B know what options the
other company has: to bribe the official or not to bribe him. Also, consider that the government is in need of goods or
services worth $5M, which would make the company supplying it a profit of $2M (assuming a 40% margin), and that the
official is asking for 10% of the order (0.5M) as bribe.
Possibilities
A
• Neither company bribes the official. The order is split between the two companies.
 A earns $1M and B earns $1M
• Both companies bribe the official. The order is split between the two companies.
 A earns $(1 – 0.5)M = $0.5M and B earns $(1 – 0.5)M = $0.5M
The figure shown to the right is the payoff matrix of this problem.
0M
0.5M
Bribe
0.5M
• B bribes but A doesn’t, therefore the order is placed with B.
 B earns a profit of $(2 – 0.5)M = $1.5M and A earns a profit of $0.
Does
not
Bribe
Bribe
• A bribes but B doesn’t, therefore the order is placed with A.
 A earns a profit of $(2 – 0.5)M = $1.5M and B earns a profit of $0.
B
Does
not
Bribe
1.5M
1.5M
0M
1M
1M
Let us first see what company B considers to be the optimal choice based on the decisions A can make.
Possibilities
Company A bribes the official
A
Bribe
0.5M
• B earns $1.5M if it bribes the official.
• B earns $1M if it does not bribe the official.
0M
0.5M
 B would decide to bribe the official as that is more profitable.
Company A does not bribe the official
Does
not
Bribe
Bribe
• B earns $0.5M if it bribes the official.
• B earns $0 if it does not bribe the official.
B
Does
not
Bribe
1.5M
1.5M
0M
1M
1M
 B would decide to bribe the official as that is more profitable.
This means that company B will choose to bribe the official no matter what company A chooses to do, as its profits are
maximized in doing so ,i.e., B considers bribing the official the optimal choice.
Now let us look at what company A considers to be the optimal choice based on the decisions B can take.
Possibilities
Company B bribes the official
A
Bribe
0.5M
• A earns $1.5M if it bribes the official.
• A earns $1M if it does not bribe the official.
0M
0.5M
 A would decide to bribe the official as that is more profitable.
Company B does not bribe the official
Does
not
Bribe
Bribe
• A earns $0.5M if it bribes the official.
• A earns $0 if it does not bribe the official.
B
Does
not
Bribe
1.5M
1.5M
0M
1M
1M
 A would decide to bribe the official as that is more profitable.
This means that company A will choose to bribe the official no matter what company B chooses to do, as its profits are
maximized in doing so ,i.e., B considers bribing the official the optimal choice.
Both companies, A and B, determine bribing the official to be the optimal choice, irrespective of the decision of the other
company. Hence, the scenario that both companies bribe the official is the Nash Equilibrium.
Result
A
Both the companies end up bribing the official, based on their optimal choices, and earn
a profit of $0.5M each.
Does
not
Bribe
Bribe
This is not the globally optimal choice.
0M
0.5M
Bribe
Had both companies chosen to not pay a bribe, they would have earned $1M each,
which is twice the amount that they earn by bribing.
Hence, making the decision based on maximization of individual profit and without the
consideration of laws and ethics results in selection of a non-optimal scenario for both
companies.
0.5M
B
Does
not
Bribe
1.5M
1.5M
0M
1M
1M
In this same example, if there were strict legal and religious barriers to bribing, neither company would have bribed the
government official, and each would have made the highest profit possible, $1M.
Similar outcomes can be seen in all other cases where decisions are based on individual profit maximization and unethical
practices are involved.
To solve this problem:
• The society should function as a cohesive unit and aim at attaining the globally optimal scenario.
• Unethical practices should be avoided.
This is where the role of our laws and religion becomes important.
Laws set up against unethical practices and the knowledge that our religion provides against unethical practices
guarantees that nobody in the society performs them. Therefore, performing an unethical practice himself would no
longer be the optimal choice for a member of the society. This would make the globally optimal state the equilibrium
state.
Hence, trust in the society derived from our lawful and religious views of its citizens makes it function as a cohesive unit
and attain the globally optimal scenario. Thus the society performs at its highest efficiency.
It is therefore, very important that we free our country of unethical practices, and follow our laws and our religion with the
greatest sincerity.
Homework
You and your classmate are owners of two companies in a duopoly. You have made a deal with them to limit the
production of your companies to 1000 units each to keep the market prices high. However either of you could easily
cheat on that agreement.
• If no person cheats, each earns a profit of $2M.
• I one person cheats and the other doesn’t, the cheater earns a profit of $2.5M while the other person earns a profit
of 0.5M.
• I both cheat, each earns a profit of $1M.
Q1. Which scenario is the Nash Equilibrium?
Q2. Is this the best scenario possible?
Q3. Explain how legal and religious compulsions on ethical behavior can help in the attainment of the best outcome in
this problem.