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A “Selfie” of Finance and Ethics

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On Values in Finance and Ethics

Part of the book series: SpringerBriefs in Finance ((BRIEFSFINANCE))

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Abstract

Historically, finance and capital market theory have passed remarkable milestones. They have developed from a very practically minded tool box for the requirements of a firm’s financial management to a highly sophisticated scientific discipline. The focus on mathematics, statistics, and physics has encouraged groundbreaking research in modern capital market theories. Without exaggeration it can be claimed that, for years, the research output of finance has outshone other research fields in economics and business administration. Financial economics have emerged in tandem with natural sciences, just as Irving Fisher and his followers have been sincerely wishing for. With the success of well-known capital market models in both practice and academia, the neoclassically based dichotomies between the real and the monetary sector have become fact. However, repeated crises in financial markets augmented a growing distrust for stakeholders, politicians, regulators, and media concerning the stability and efficiency of the financial sector. A growing awareness of and the demand for ethics and morality in financial markets has increased over the past decade. It has inspired new research that questions long-standing positions in finance but has still been unable to lay the groundwork for a new paradigm in finance and capital market theory that integrates ethics and morality within finance. Nevertheless the need to think and elaborate on finance and ethics remains.

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Notes

  1. 1.

    Fisher’s point of view and self-understanding is very reminiscent of the later so-called debate on positivism that underwent an intensive programmatic discussion in economics under the umbrella of the monetarism debate between the two Nobel laureates Milton Friedman and James Tobin. Friedman defended the research community of positivism. He argued that sound research can be based solely on axiomatic grounds and the resulting explanations are valid although they have not been verified through prior realistic circumstances (Friedman 1953, p. 4). Tobin criticized Friedman and his proponents for causing the so-called “post hoc ergo propter hoc” problem, i.e., missing a causal model as the underlying rational for empirical validity (Tobin 1970).

  2. 2.

    The development of new classes of mathematical formulated valuation models with exact solutions has fascinated practitioners in capital markets until recently. With such tools, every skilled agent was able to calculate asset prices with his pocket calculator and later on with Microsoft Excel program and other claculation software. More complex calculations were eased by preprogrammed spreadsheets that could be retrieved by the F9 button. In a heretical article in the Financial Times, such agents therefore have been called F9 monkeys (Tett 2005) as they rely solely on mathematical operations without any deeper understanding of assumptions and model causalities that lie behind.

  3. 3.

    Uncertainty can have two origins: lack of information (which is substantive uncertainty) and limited cognitive capabilities of decision-makers to consistently pursue their objectives with given information (represented by procedural uncertainty) (Dosi and Egidi 1991, p. 145).

  4. 4.

    So-called Black Swans as Taleb (2007) has discussed it.

  5. 5.

    “Expectations, since they are informed predictions of future events, are essentially the same as the predictions of the relevant economic theory” (Muth 1961, p. 316).

  6. 6.

    Sources: https://www.investopedia.com/articles/investing/020216/three-most-notorious-rogue-traders.asp; https://www.theguardian.com/business/2012/nov/20/ubs-rogue-trader-guilty-fraud; https://archives.fbi.gov/archives/newyork/press-eleases/2011/hedge-fund-billionaire-raj-rajaratnam-found-guilty-in-manhattan-federal-court-of-insider-trading-charges, https://www.sfo.gov.uk/2018/07/12/two-former-senior-bankers-convicted-of-fraud-in-sfos-euribor-manipulation-case/).

  7. 7.

    Similar arguments can be found in publications of supranational organizations, e.g., UNEP (2015), UNCTAD (2015), UNEP FI (2018), and United Nations Framework Convention on Climate Change (UNFCCC) (2010).

  8. 8.

    Stakeholders are “(…) those groups who can affect or are affected” (Freeman 1984, p. 49).

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  1. Institute of Business Administration, University of Stuttgart, Stuttgart, Germany

    Henry Schäfer

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Schäfer, H. (2019). A “Selfie” of Finance and Ethics. In: On Values in Finance and Ethics. SpringerBriefs in Finance. Springer, Cham. https://doi.org/10.1007/978-3-030-04684-2_2

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