Behavioral finance FAQ / Glossary (Ethics)
This is a separate page of the E section of the Glossary
Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
Ethical, ethics (in business and financial decisions / information)
01/2i,3i,4i - 02/7d - 03/1i,10i + see altruism, fairness,
common good, transparency, manipulation, deception,
principal-agent, perverse effect, externality, empathy,
moral hazard, genetic utility, overreliance
Making self interest and common good live (happily?) together.
Ethics are a set of principles aiming at guiding
behaviors to what is considered fair to other people.
A bit of philosophy, here...
Ethics lead to some voluntary limitation of one's own interest
* for moral and social considerations
* and for what is deemed to be the "general interest".
It relates to a sense of fairness and genetic utility (see those words).
This is a dent in the "economic man" theory (see that phrase) that considers
that this ever present mythic guy always choose his own interest and thus that
rational choice governs most economic decisions.
On the other hand, ethics in economy can be considered as just an extension of
"economic rationality" towards higher goals and needs (see needs).
....And some questioning also
But ethics can also have its pitfall.
A close attention to its effects (possible surprises ) is needed.
The double question is:
How far half baked good intentions might bring disasters.
How far can some despotic societies use the concept and consider individuals as
just cogs and pawns under pretence of what they declare to be the
"common good" (see "moral hypocrisy").
Good intentions as well as common good are not too clear concept and can
bring perverse effects / excesses as shown in the "fundamental issue" subsection below.
=> Some balanced position of the cursor has to be found.
In what and how ethics apply
Peace, love and money.
Ethics applies in many human and social occupations, among them in money-related areas:
work ethics, business ethics, corporate responsibility, lending ethics, investment ethics,
and this is only a short list.
Although this kind of formal or informal code varies in space and time, it is
usually based on a couple of main "commandments" on which most people agree:
A general one:
You shall not fulfill your interests
at the expense of other people
what economists call negative externalities:
A main specific
You shall not rig the market
a principle far from being respected in the subprime fraud.
ones also for
You shall not rig the information
You shall not play too much with other
people money (overleverage)
Several glossary articles, for example those on deception and
manipulation show how those principles are often transgressed.
From attitudes and principles to formal rules and practices
Engraved in the mind? Or engraved in stone?
The quest for ethics reaches various knowledge areas,
with different (but complementary) approaches:
Neuroscientists link ethical attitudes partly to cognitive and emotional
drivers, that are ingrained in the human mind.
Among them are "altruism", "fairness", "empathy" or "common good", and
sometimes ..."gullibility" because of an "affect heuristic"
Mind you, the mind can have its dark side, with hatred and a will to harm!
Sociologists see those attitudes as partly due to social learning,
that leads normally to cooperative behaviors
Philosophers draw moral / ethical principles, as ideal behavior guidelines.
And here come the lawyers and regulators.
Some of the ideal principles or orientations stated by sociologists and
philosophers are not too easy to interpret and to apply in real cases.
Thus those normative criteria are often imbedded as:
Formal "ethical rules" in laws, in regulations, in professional codes
They are completed by specific criminal laws that notably are applied to
blatant frauds (see deception)
Or, quasi-formally, recognized "best practices" and "common norms"
of "social responsibility".
Formal rules can bring their perverse effects, externalities, moral
hazards, biased "good intentions"
When regulations become perverse.
When too much common good becomes common bad.
When some good intentions bring calamities.
Scandals occur from time to time in business and financial circles and put regularly that
issue on the limelight.
Usually those occurrences bring a flurry of hand-wringing followed by building
impressive and complicated regulations considered as protective fortresses
The effectiveness of those administrative measures is often relative, as human malignity
makes that temptations to misbehave will always exist.
Those measures might even bring their own biases, "perverse effects" and "moral hazards"
(see those phrases):
Those legal normative criteria, either too narrow or fuzzy, and conflicting one
another, are sometimes at the detriment of clarity.
Their massive complexity, not to say useless complication, can feed
a cognitive overload,
This is found not only in economic and financial matters, it is also a well
known man-made plague in Law compliance or in technical specifications.
Too abundant and sophisticated norms tend to create a perverse social
They tend to complicate the life of honest people. At the same time
they create loopholes, opportunities (*), or even legal protections for the
smartest / the most dishonest people who know their intricacy and
the tricks to take advantage of them.
(*) Corruption find sometimes its sources in strict regulations, made
"flexible", or even more jockingly "humanized", thanks to ...bribes.
Another issue, more general than the legal aspects, is that
what seems to be the "general interest", "common good" or "social
utility" can sometimes be a delusion, a magical belief, or sometimes
an "affect heuristic" that might make blind to real situations. Unluckily, hell is
paved with "good intentions" thwarted by fancies, fads, incompetence
...and also ideological tenets.
"Ethical" principles, rules and intentions, could in some cases become a
source of exploitation of other people in an unforeseen way.
Here is the paradox:
Behaviors that are felt as fair, moral and even generous have sometimes
On the other hand, some others considered as self-serving can be
(sometimes) a gift to mankind.
In decision making, better use not only conscience,
but also science (and a sense of anticipation),
Another thing is that principles, paradigms and heuristics (see that
word), however useful and practical they are to make decisions, are
sometimes sources of rigid behavior and therefore they should not fully
freeze or replace thinking.
Ethics and economic confidence
Fool plays kill business trust
The economy, like many human and social activities, is in itself
not ethical nor unethical.
But needless to say, in cases when the economy is
considered to work largely unfairly (see fairness)
and unethically, this feeling:
Thwarts confidence and discourages positive initiatives
Incites not to "play the game" or to "beat the system",
Can be therefore an obstacle to a balanced and sustainable
Ethics, brand image and financial governance of firms
Are all stakeholders equal?
Ethics applies of course also to individual firms.
Brands should better build and maintain a good image / ethical reputation and avoid
This should be part of their marketing and public relation strategy.
Firms should strive to avoid unethical conducts and "negative externalities"
(see that word).
They should try to be fair to their various "stakeholders" and to the general public.
In corporate finance, a specific issue is about conflicts of interests between top
management and shareholders (and other investors).
As the "principal-agent theory" shows, the top management may, if its reward system
Take decisions that satisfy more its own interest, or even pure greed, than the
interest of the firm,
Not be too transparent in its reporting of the corporate situation.
Ethics in finance and specifically in stock markets
When ethics influence the stock quote. But which way?
Some unethical temptations are specific to finance and notably asset markets
(see manipulation, disinformation, deception...).
Here, not only listed firms have ethical duties, but also external
players such as fund managers, brokers, financial media.
Those agents can easily manipulate the markets and
Ethical watch and whistle-blowing are useful. Various scandals have led to research in
financial ethics.This has led to deep regulatory consequences for financial professions.
Actually, like most bureaucratic rules, they tended to hide a lack of common sense,
real oversight and smart anticipation by empowered watchdogs: see "overconfidence
See also the "deception" article.
Consequences on market prices and returns:
The public, which includes investors, is more and more sensitive to business
ethics and fairness.
People seem usually ready to pay some premium for an ethical asset.
In other words to accept à lower return for such investments.
Firms that care - or that seem to care - for the common good - or what is
perceived as such (*) - might enjoy an "ethical premium" on their stock price.
Others that are or seem to be less caring or fair to their various "stakeholders"
may get, as deserved or undeserved, bad opinions and have rotten tomatoes
or worse thrown at them
That ethical premium could be included apart
in the level of the stock image coefficient.
On the other hand some "vice" investments (**) might be well trusted by
investors and show bright market performance.
It is rather consistent anyway, as a lower price can bring a higher return.
(*) Notwithstanding possible unintended consequences.
(**) For example casinos, weapons, liquor, cigarettes or whatever can be
seen as vice.
Although vice and virtue are matters of opinions, social pressure tends
to define what is "politically correct" and "socially-accepted").
Some "ethical (or socially responsible) investment funds" are based on the
professional selection of:
Firms that are considered more ethical than others,
And/or economic activities that are seen as more beneficial than others
(*)To find those messages: reach that Behavioral-Finance group
and, once you are there,
1) click "messages", 2) enter your query in "search archives".
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