ETHICS IN FINANCE, PRACTICAL ISSUES AND PROBLEMS -Moral-> unwritten rules and personal rules (can also apply to social rules). -the individual sense of what’s right and wrong. -dynamics between general and own rules. Conflict between Hegel and Kant regarding morality (Moral und Wirklichkeit). -Ethics: standard of behavior that we need to cooperate. -set of values or structures in which we discuss in one or other way. We must find rules for arguing. Thomas Hobbes-> humans are wolves for other humans (homo homini lupus). -Governance: the code of conduct of a Company. Three classical approaches to ethics Characteristics of Virtues according to Aristotle: according to his ethical theory, the virtuous person exhibits the joint excellence of reason and character. The virtuous person not only knows what the good thing to do is, but they are also emotionally attached to it. In addition, these two excellences, or virtues, are intimately connected, so that one cannot be had without the other. Virtue ethics Virtue ethics refers on aspects of individual judgement, behavior, habit and acting and their individual forming. Wherever a single actor has influence on his behavior and habits, virtue ethics can provide assistance. This is not related for reaching individual goals or to cover individual responsibility for results and consequences but to establish individual ethics. The role models of virtue ethics work, wherever in complex and contingent situations the rational goal-oriented analyses provide only little orientation. The ethics of duty The ethics of duty -as a third ethical theory-concentrates on the fact that all ethical foundation must be found directly in thinking and reason. Virtue ethics explains orientation out of the action itself. Utilitarian ethics explains ethical orientation in the best utilization of resources. What are virtues? Virtues, according to Aristotle, are related by human nature, are good and enduring permanent attitudes and must be acquired by education. Good action depends on circumstances and there is no unique rule determining each single case. Virtues are the median between 2 extremities (mediocre thesis): - Mitigation or temperance is between voluptuousness and bluntness, - Courage or braveness is between daredevilry and cowardice. “Virtue is an attitude by decision, well grounded in our midst, a median determined by reason and by the means by which a prudent person would determine them.” How will humans become virtuous? (according to Aristotle) Right and in an ethical means good action can and must be learned, to act continuously right and good and to develop one’s own ability to judge in relation to these actions. Reasonable virtues (dianoetic Virtues -wisdom, artistry, reason, sapience, scientifically) Virtues by character (ethical virtues). Superordinated virtues by character are useful to find right means, moves and ways for action to make in concrete situations where they must choose right choices. Rehearsals of ethical virtues (virtues of character) are useful to control oneself drives and affects and helps actors to reach more autonomy in live from being focused on desire and avoidance of pain. Classification of virtues Virtues by reason -knowledge about things that can be changed or are immutable -production of artifacts -only wisdom is linked to an action by means of reaching a good life. -wisdom is (besides all virtues by character) necessary to act in concrete situations according to the aims of a good life. Virtues by character -Virtues by character are attitudes you are able to compliment or to criticize. They get calibrated y education and habituation and cannot be understood in the sense of conditioning. -Virtues by character are only existent, if persons decide by knowledge for respective acyions, and this not because of sanctions than because of the virtuous action itself. Those virtues are distinguished by Aristotle in several groups acting inside the world: General virtues, virtues dealing with money and ownership, virtues dealing with reputation and honor, virtues related to communication, virtues inside the political life. Felicity will be reached by the dianoethic virtue or virtue by reason of wisdom (Sophia). Ethical virtues. Overall virtues: courage or braveness, mitigation, or temperance Virtues in dealing with reputation and honor: greatness of mind, cleverness and intelligence, gentleness. Virtues of political life: justice. Virtues in dealing with money or ownership: munificence, mitigation, or temperance. Virtues related to communication: truthfulness, empathy, kindness. Basics of Virtue-Ethics Right and good action is based on right and good attitudes and character traits, more than on function or results. If people rehearse these virtues, they can act and react appropriately in decisionmaking contexts. The benchmark for right behavior is the “ideal” of a virtuous human, or the ideal actions of a virtuous human. There is no absolute rationale why things should be done or neglected. Consequences of actions are not getting judged in virtue ethics. Virtue ethics is no solution for single case judgements. Virtue ethics: relevance for an ethics of finance - Attitude itself is a component of individual ethics, for which each person is responsible by itself. - According to Aristotle, ethical reasoning is done by a metaphysical foundation, having in mind an ideal of a good society that cannot be analyzed again. Also, virtues help the wealthy and free man to focus his actions to this idealistic aim of society. - Virtues are only measures for individuals, nor societies, to provide orientation for social settings, whenever explicit rules are not available. - According to Hume: action is not guided by ratio, and we must develop virtues to understand our influence in shaping our own actions. - Virtue ethics is used to argue in a behavioral sense to integrate psychological ideas and facts. Utilitarianism People have goals or aims, they try to reach their aims in social circumstances and use individual as well as social facilities and options. Problems to be solved thereby are related to their individual understanding of goals as well as the potentially social goals and the hierarchical order of the latter. This hierarchy of goals must be distinguished in teleological aims and consequentialist conclusions to adjust them to terms of justice and the related analytical power. Jeremy Bentham He’s the philosophical father of utilitarianism (an introduction to the principles of morals and legislation). Based on understanding of “two sovereign masters…pleasure and pain” argued that “it’s the greatest happiness of the greatest number that is the measure of right and wrong”. The degree of pleasure/happiness/utility is calculated by “felicific calculus”. Main criticism: -too basely hedonistic, -Does not sufficiently allow for higher values and for justice as the principle (and the calculus), -Does not systematically safeguard against one person’s good being attained at the cost of another person’s good (so long as the summative amount of good is increased). John Stuart Mill He continued the development of the utilitarian discipline. He improved the theory against the main point of criticism by arguing that, rather than conducting the hedonistic felicific calculus, attention should be paid to the “qualitative” differences between types of good (body vs spirit(ual)). (In situations of conflict, preference should be given to the qualitatively superior spiritual goods.) Appreciation for justice is a qualitatively superior good. Unjust actions whereby one person suffers for the sake of another person’s good would have a negative effect on total societal utility: unjust actions don’t lead to achieving the utilitarian principle of “the greatest happiness of the greatest number”. Principles of utilitarianism Consequentialism Judgements on actions are related to their outcomes and consequences. They are the outcomes of action predominantly positive the action itself will be judged positive. Utilization A benchmark is needed to determine whether consequences are positive or negative. Consequences of actions are positive, if they bear the highest utility for all involved or concerned participants. Hedonism Actions are useful if they facilitate the good. Humans try to maximize pleasure and to minimize pain (Bentham). Universalism Which consequences of actions maximize utility and welfare of all humans? Variants of utilitarianism 1. Act utilitarianism to rule utilitarianism, -a single action can be judged as right, showing that the action follows a moral rule. Someone is judged as wrong if they violate a moral rule. -A rule is moral in the strict sense, demonstrating that they recognize the summum bonum as the goal or end. 2. Average utility utilitarianism -The end of a society is to reach the highest possible sum of utility -One probable means to reach this, is to increase the number of people who can perceive pleasure. 3. Preference Utilitarianism -The preference utilitarianism focuses on the preferences and wishes of inviduals and not on the individual pleasure. -Utility will be increased if the preferences and whishes of involved people are met. From act utilitarianism to rule utilitarianism The rule-based utilitarianism is closely related to Kant’s categorical imperative: Not every single action shall be judged under hedonistic calculus but the proposed results if individuals in concrete situations act according to the same rule. A concrete action is justified if it follows a moral rule. Only the usefulness of the rule will be surveyed. At the end utilitarian ethics separates between hedonism and consequentialism. Utilitarianism and scales -Ordinal scale and cardinal scale -Scalability On the one-dimensional utility of goods Ordinal utility measurement does not measure the utility difference between 2 bundles of goods with any significant significance. An ordinal utility function only says about the utility of 2 goods which of the goods has a higher utility and not how much higher the utility is. Cardinal utility measurement assigns significance to the utility difference between the 2 bundles of goods. The cardinal utility of a good can be quantified, so represented as a number. For a cardinal utility measurement, the unity is approximated by cash flows. For profit-oriented companies, it’s assumed that sales correspond to the utility and profit to net utility. The concept of utility enables the measurement of the economic efficiency of an individual decision or a company decision, as it supports rational decision-making. John von Neumann and Oskar Morgensten derived the cardinal utility of these goods: for this purpose, the individual is offered a lottery in which good A or B can be won with a certain probability. If the individual makes decisions between 2 such lotteries with different probabilities, a cardinal expected utility of both goods can be derived from the series of decisions made. Transformation of ordinal relationships into cardinal utility comparisons: cardinalization Through the transformation performance of social communication systems, previously incomparable objectives and values are first placed in an ordinal relationship and then hierarchically ordered on a cardinal scale. How the results are ultimately evaluated in the hierarchical order is analyzed against this background. Individual: action ideas, value ideas, utility ideas in social situations. - Economy as an ordinal relationship of individual ideas about the resource aspect. - Money as a cardinal structuring of ordinal relationships in the economy. Problems of utilitarianism in economy The Anglo-Saxon understanding of utility as applied in the teaching of modern economics has its roots in the Bentham/Mill conceptualization of utilitarianism. Under the assumption of identical economic agents, all agents are equally able (or unable) to maximize their individual utility at the cost of another agent’s utility – so fairness is given. In this setting “the greatest happiness of the greatest number” is best achieved when each agent strives to maximize their individual utility – as everyone is best informed about their own preferences. In reality, not all agents are equal, and this means that, in order to reflect Mill’s idea of “qualitatively superior goods” (justice, for example, must be included in the individual utility function). Nonetheless, the inclusion of a feeling of suffering from injustice in an individual utility function is dependent on: - The individual knowing the injustice has occurred, - The individual truly experiencing empathy with the negatively affected individuals. In today’s globalized world, truly understanding all the consequences of one’s action is practically impossible – as is literally experiencing suffering for the sake of a multitude of other individuals. Hence, some other means of guaranteeing the justice of one’s actions is necessary. Deontological ethics Deontological ethics is related on duties or superior “duty” to obey the intrinsic law of ratio. Deontology is the normative ethical position that judges the morality of an action based on the action’s adherence to a rule or rules. Described as duty or obligation or rule-based ethics because rules bind you to your duty. Deontological ethics is commonly contrasted to Consequentialism and virtue ethics. Immanuel Kant: Die Abstraktion der Moral. “Truth tells us how the world is; morality tells us how the world should be” (Immanuel Kant). A real adult is who leaves back the small-minded realism and dares to look beyond the facts upon the possible; and who can discriminate the good and the evil reasonably. The values of enlightment: the right for luck and happiness, reason and rationality, veneration, hope. Morality is the usefulness of reason. So much for the first proposition of morality: for an action, to have genuine moral worth it must be done for duty. The second proposition is: an action that is done from duty does not get its moral value from the purpose that is to be achieved through it but from the maxim that it involves, giving the reason why the person acts thus. So, the action’s moral value does not depend on whether what is aimed at in is achieved, but solely on the principle of the will from which the action is done, irrespective of anything the faculty of desire may be aiming at. Volition is only because of its willing for himself good and moral will. What makes a good will good? It is not what it brings about, its usefulness in achieving some intended end. Rather, good will is good because of how it wills (so, it is good in itself). Immanuel Kant: morality is the “good will” in the use of reason. “The good will is not good because of what it causes or accomplishes, not because of its suitability for achieving any given end, but only because of the will, which is in itself”. This means that reason must produce a will that is good in itself, that is, a willing will. But what is this concept of a will that is highly valued in itself and good without any further intention? It is the will to duty and not to good action. A priori-a posteriori A priori: - Purely for reasons of reason and rational knowledge - Independent of experience - Logical - A priori judgements are made without a basis in experience, they are conditions of experience or derived from them. A posteriori: - From sensory experiences - Empirical - In contrast to this are made on the basis of experience, - In general, all analytical judgements are considered a priori, - Analytical judgements are a priori true because their truth arises from the meaning of the terms. Synthetic – Analytical Synthetic: derived from other statements (from experience or principles of reason) Analytical: - Arising purely from the meaning of the concepts, - The term “synthetic judgement a priori” refers to judgements that are not made from sensory experience but are a priori and whose truth is not based on the decomposition of concepts, which is why the judgements are not analytical. Possibilities for deriving actions from their moral value. An ethic that derives its maxims solely from this duty is called deontological ethics or duty ethics. An action based on duty doesn’t have its moral value in the intention that is to be achieved through it, but in the maxim according to which it was decided. All further moral procedures must be derivable from this highest maxim. Duty ethics is necessary when action maxims are established for which no sensory experience is available, which are therefore derived solely from reasons of rational knowledge. Immanuel Kant: Morals as acting in duty against reason. “So, I don’t need to be a very penetrating thinker to bring it about that my will is morally good. Inexperienced in how the world goes, unable to prepare for all its contingencies, I need only to ask myself: can you think that your maxim becomes a universal law?” “How can pure reason, all by itself without any outside help from other action-drivers, be practical? How can the mere principle of the universal validity of its maxims as laws…create, unaided, an action-driver and produce an interest that would be called “purely moral?” In short: how can pure reason be practical? All human reason is wholly incompetent to explain this, and it’s a a waste of trouble and labor to try.” Categorical Imperative Act in such a way that you always treat humanity, whether in your own person or in the person of any other never simply as a means, but always at the same time as an end. Act only according to that maxime by which you can at the same time will that it should become a universal law. Act only so that the will through its maxims could regard itself at the same time as universally lawgiving. Deontological and Kantian ethics inside financial markets Reason itself has intrinsic rationale where real models of justification must set up upon, to make clear moral judgements into real situations. Not the intentions or perceptions are causes for moral reasoning and quality, but the maxim by which actions are decided. Dealing inside finance only action in duty to reason can be the foundation of morals. All other rules must derive from this duty and therefore from reasonable action (synthetical judgement a priori.) Virtue ethics in investment banks Virtuous behavior. Speculative nature of trading can erode values. Codes of ethics have the positive attribute of being focused on broad principles. Desirable human traits or characteristics that naturally work to promote good behavior. Utilitarianism and consequentialism in investment banks Consequences or behavior is relevant. Ethics and competence can be related. Ethical investors have detailed policies regarding business with contentious sectors. How to deal with these policies must be considered in investment banking codes of ethics. Focus on what we should do and how we know what we should do. Deontological approach in investment banks. Rights and duties have universal roots. Universally grounded ethics. Banks have a duty to stakeholders. A good firm must be technically competent. Focus on what we should do and how we know what we should do. Trust is a main item of deontological ethics. Ethical approach for investment banking. Rights and duties in investment banking Right to utilize its intellectual property and infrastructure but constrained by duties: - Care as intermediary: care to both, clients, and customers. - Act honestly don’t lie or mislead. Ethical duty to uphold market standards of behavior: - Following applicable legislation and regulation, - Simply following normal market practice is not sufficient from an ethical perspective. Off-market trading requires clear ethical standards. Investment banks have a clear duty to support established markets. Ethical issues in investment banking Manipulating credit ratings, mis-selling securities or M&A deals, over-leverage, unauthorized trading, insider dealing, market manipulation and market abuse, CDOs/CDSs and off-market trading, speculation, and short-selling. Ethical issues in investment banking related to clients. Keeping promises is archetypical good ethical behavior as it engenders trust. Misleading clients is ethically similar to lying. Ethical issues in investment banking internal Abusing resources: using and charging unmerited expenses. Hospitality and corporate entertainment: virtuous behavior is informed by motives and results. Managing behavior: abuse of power by abandon professional performance and not taking management responsibilities seriously. Abusing client trust: no institutionalized bullying. Remuneration and bonus points: justification of bonuses is often questionable. Tax: don’t optimize tax payments in an abusive way. Ethical implication of investment banking. Addressing ethical issues will reduce intervention in the investment banking sector. Economic free ride imposes an enhanced ethical duty to support the government. Problems caused by management failure can’t be solved by more ethical concerns. Ethical standards reflect the standards generally prevalent in business. Outside regulation is required where internal determination of ethics will result in losing profitable business. Financial and ethical incentives differ for senior and junior bankers.
