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Ethics In Finance: A New Financial Theory For A Post-Financialized World

On Thursday 30 May, Dr Kara Tan Bhala from University of Kansas treated lecturees at St Cross to a crash course in Modern Finance Theory (MFT) and its limitations. Guiding listeners through weighty acronyms and weightier formulae spiked with Greek alphabetical symbols, she deftly dispatched MFT with the following:

  • that economic agents are non-rational;
  • that fairness plays a part in finance; and
  • that in our post-financialised word,  “homo economicus” (some kind of Thatcherite love-child I wondered idly?) is well and truly an endangered species.

She went state her self-admittedly “quixotic” mission for an altered financial theory which properly accounts for, or exposes an underlying ethics and morality. As she envisaged it, this mission is at once 1) an addition to MFT such that it also includes principles of ethics (let’s call this MFT-plus) and 2) the creation of a new financial theory which is based on MFT-plus and principles from two other theories, Islamic finance and behavioural finance. This would unite the forecasting functionality (such as it is) and ethics of MFT-plus, the “unapologetically ethical” and community-beneficial values of Islamic finance, and the psychological sensitivity of behavioural finance.

It is to Dr Tan Bhala’s credit that such a mission has led to her leaving her own presumably highly lucrative and powerful positions in the finance world, in order to set up a global think-tank, the Seven Pillars Institute for Global Finance and Ethics. However, there is clearly a lot to think about, as demonstrated by questions following the lecture.

She met with a passionate reception from a varied audience comprising ethicists, philosophers, financiers and associates of big pharma. The usefulness of Islamic Finance Theory was questioned given that its application in many Islamic states wreaks an apparent gaping inequality of wealth and power. So too, questioners were uncomfortable with the retention of MFT in Tan Bhala’s mission, it having been shown by Tan Bhala herself to be an inadequate quantitative and forecasting agent. It was unclear therefore whether her mission will be to bin MFT completely, or propose a radical alteration, but in either case it was clear the struggle will be gigantic (windmill-tilting, anyone?)

The discussion moved onto telos, with agreement that the free market economic model has not been allowed to express its natural purpose or telos, multiple financial crises having been patched by governments and thus persisting the current (dysfunctional) model. Questioners argued that until the telos of the free market is allowed true expression, and is allowed to fail, change will be highly difficult. When asked whether such change could be fomented by academia, the speaker’s own experience was disheartening: namely censorship by her institution of the teaching of novel financial theories.

With the speaker showing no sign of tiring, but the resonance of this sobering thought being felt, here ended the discussion.  This blogger concludes that when moral and financial bankruptcy have the (market) freedom to collide, the field will be fertile for development of a value-enriched financial system. Until then it is up to organisations such as the Seven Pillars Institute to take to that field with all the chivalric heroism they can muster – may the sparring commence!

Audio file available here.

The St Cross Special Ethics seminars are hosted by the Oxford Uehiro Centre for Practical Ethics. They are held twice-termly at the college. For more details click here.

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