Part 4 of 4 - Ethics of the financial crisis
Greed
Prospect theory
Self-serving bias
Self-deception
Ethical fading
Acts of omission
Ethical numbing
Working with money makes you vulnerable
Banking fraud
How to improve ethics
Banking reforms
Can the Global Financial Crisis be prevented in the future
Greed
How many times have you seen politicians and market commentators talk about “greedy
bankers” . Is greed perhaps not a human trait that has been around for centuries? Is “greed”
at the heart of capitalism? Is greed at the heart of all human societies?
Could it not be argued that greed is “simply the compulsion that helps anthropomorphise
(ascribe a human emotion to something) the capitalistic spirit”
“The problem of social organisation is how to set up an arrangement under which greed will
do the least harm; capitalism is that kind of system” – Milton Friedman
You cannot explain a change (the causes of the GFC) with a constant (human greed)
and that as the US financial crisis inquiry report states to pin the blame for the crisis on
greed is an oversimplification of it.
“I understand that many of my fellow citizens viewed the bailouts with bitterness and
anger .. Yes our way (capitalism) of doing things occasionally needs repairs and overhauls –
but I have yet to see an alternative to our system that can provide as many people not only
with their needs but also with the promise of much better lives
What does the term “to act ethically” mean to you?
Could it be that you feel it is wrong emotionally – an act evokes a sense of injustice? Does it
go against a cultural norm which you identify? Can you rationally judge it to be wrong (it has
foreseeably bad consequences)
How do we rationally judge
If you apply utilitarianism principles, any act that increases the total utility across society is
good, and to act ethically is to increase total utility. Deep pragmatism, something is ethical fi
it is good for society as a whole.
Which is different from Kantian ethics ”do to others what they would do to you”.
If we can decide on what is ethical, whose responsibility is it to enforce it?
There is an argument put forward (eg Milton, Soros, et al) that finance is amoral and that
the objective of business is to maximise profits within the rules set by governments and
regulators. To do anything else would be inefficient, and lead to underperformance.
In deciding what responsibility businesses have to act ethically is a value judgement.
Leadership
Shareholders
Government
Why would we act unethically?
Rationale economists, eg Gary Becker, would say we would consider these 3 factors in terms
of the Simple Model of Rational Crime. So if someone were to make a decision to act
unethically he would asses these 3 areas.
, 1. The benefits we get from cheating
2. The probability of getting caught
3. The expected punishment
Then we would way up the benefits versus the probability of being caught x the expected
punishment
Example
Gain from cheating is £1000. The probability of getting caught is 50%. Punishment for being
caught is £800
Would we cheat??
Then gain of £1000 is GREATER than £800x 50% and we cheat
Prescriptive and rational approach that we make a conscious and rationale decision to act
unethically. Plays very much into the bad apple, or an apple in a bad apple cart.
Therefore to improve ethics
We need ethical training which emphasises the moral component of decisions so that we
inspire people to make the right choice and we create incentives which discourage unethical
decisions.
Instead of focusing on how we should behave we should start with focusing on how we
actually behave. Behavioural economists would argue that we are not entirely rationale
when it comes to deciding whether to cheat.
Behavioural ethics
Argues that we don’t look at the decision rationally but rather are influenced by a number of
psychological factors and that our decisions in terms of ethical actions are not always
rational. And that often our decisions are made on factors outside of our awareness.
We have inflated beliefs in our own ethicality and very limited awareness of how our minds
work. “Many ethical infractions are rooted in the intricacies of human psychology rather
than integrity. Bounded ethicality focuses on the psychological processes that lead even
good people to engage in ethically questionable behaviour that contradicts their own
preferred ethics.”
People can make unethical decisions that are outside of their own awareness and
inconsistent with their own underlying ethical beliefs. Referred to as “bounded ethicality”.
How many of you think of yourself as good honest people and as more ethical than
average? How many of you have lied in the past week?
Our behaviour is often driven by 2 different and competing motivations
1) we want to think good of ourselves as upstanding honest citizens
2) we want to maximise our returns, to cheat
We do so by compromising .. We cheat a little bit so that we can still benefit from cheating
while at the same time still feel good about ourselves.
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