This article was originally published by FEI Daily. It is republished here with the permission of Financial Executives International.

Kevin McCarthy says he was blindsided by a conspiracy that resulted in him being charged with mail fraud and sentenced in 2004 to four years in prison. Today, he says, he tells his story to help leaders recognize their biases and blind spots before it’s too late.

McCarthy served his time for the $90 million shareholder scam at Znetix, where he was vice president of investor relations. He says the affair taught him a lot about blind spots — the “hidden biases, implicit associations, memory traps, and thinking errors that affect your behavior and decision-making.”

FEI Daily spoke with McCarthy about the three blind spots he says executives should be aware of, working with Znetix “ringleader” Kevin Lawrence, and the dangers of “ethical fading.”

Why did you write your book, “BlindSpots: Why Good People Make Bad Choices,” and what can business leaders learn about their own blind spots?

My overarching vision and goal is to provoke thought and to help people become more aware of the things we don’t know — the blind spots that impact our decision-making processes.

I’ve categorized blind spots into three groups: preoccupation, oblivion, and presupposition.

The premise of preoccupation blind spots is that we’re moving at the speed of life, as I like to call it. So often we’re preoccupied with the day-to-day minutia of what we do. Sometimes, on a larger scale, we’re so preoccupied with our career trajectory that we’re simply not paying attention to some of the things we should be paying attention to. We make decisions in that mindset that end up having adverse effects on our relationships and our careers.

Kevin McCarthy

The oblivion blind spots are psychological areas that impact our decision-making and behaviors that, most of the time, we’re not even aware of. We make snap judgments and a lot of faulty assumptions. We make decisions when we’re in emotionally or physically depleted states, not realizing we’re in those states.

There are a lot of pressures — external and internal. Who’s putting pressure on us to make these decisions? What kind of time crunch are we under making these decisions? I think often of the 5,300 Wells Fargo employees who had external pressures put on them, and than also had internal pressures from the incentive reward bias, as Charlie Munger would refer to it. Salespeople suffer from that quite frequently.

The presupposition blind spot is where we bring presuppositions into our decisions. The most common one is confirmation bias. We may have a bias toward what we think the outcome should be or what we want the outcome to be. We bring that bias into our processes of investigation, data collection, and decision making. And if we’re not paying attention and aware that it’s a presupposition we’re trying to confirm, we may not end up with the best outcome.

We’re unaware that we have a presupposition when it comes to how people should behave, in our opinions, and how decisions should be made, in our opinions. That’s because we filter all of our behaviors and all of the thought processes through our worldview. And we’re not really cognizant that we’re filtering it through our worldview. Our reality is our reality.

Is confirmation bias problematic for business leaders in particular?

Confirmation bias can be very subtle. We may have a desire to please the board or to make sure the company is put in a positive light. Those are healthy, natural desires, but we may not necessarily realize that this bias is driving us.

If you’re aware that you have a confirmation bias, you can manage it effectively as you approach an investigation or the collection of data for whatever you’re working on, because you can challenge your own assumptions.

Another bias you discuss in the book is the expert fallacy. How does that cause good people to make bad decisions?

As we become more proficient and senior in our area of expertise, sometimes we end up with blinders and don’t even realize it. We end up with this framework through which we view our reality and believe we’ve really got this thing figured out. It makes it even harder to be humble and open ourselves up to “I don’t know what I don’t know” or “I didn’t see that coming.”

I suffered from the expert fallacy. I was an entrepreneur who, I felt, had arrived. Before I met Lawrence and became involved in his scheme, unwittingly, I had just sold a small dot-com company. I felt like, “I’m a smart guy.”

Lawrence was masterful at understanding human nature. There were 34 employees, and 12 went to prison. Each one of us had different weaknesses, and he was able to really exploit them. When the cease-and-desist order came out, everybody was up in arms.

A couple of things he said were really key, as I thought through it later. He told us not to worry and that the state “has to do what it has to do. They’re kicking the tires, they’re going to slap me with some fines.”

According the Lawrence, he’d violated some securities rules but “behind closed doors at the SEC, we have on our team Jim Sargent, who’s the former head of the SEC and he’s working with the SEC to help us go public.” Another term he used was “the Billionaire Boys Club.” The old adage was basically that there was a whole other set of rules for those in high places. And I had believed that.

When it’s part of your worldview that you think that there’s a different set of rules for billionaires or powerful government officials, it’s easy to succumb to ethical fading and ethical dilemmas.

Explain ethical fading.

Ethical fading takes place when accumulated small discrepancies or indiscretions become part of the culture. You can be right in the middle of an ethical dilemma and not realize it because ethics have faded into an abyss of nothingness.

If you’re not careful, the seemingly innocuous decisions you make on a regular basis can cause you to make larger and larger unethical decisions over time. You could make a case that a data set could easily be put in either of two categories in a financial statement, because it’ll look better and it’s not really illegal.

At what point do these minor manipulations suddenly become a major manipulation that we didn’t recognize because of ethical fading? It’s a very slippery slope.

Olivia Berkman is managing editor at Financial Executives International.

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