Seeking Virtue in Finance: A Futile Search?

At the McCombs School of Business, we train thousands of undergraduate and MBA students to pursue careers in finance. For the most part, these are nice, honest, well-meaning youngsters who wish to lead honorable lives but face great trepidation as they prepare to enter the finance profession, which is often a moral cesspool. We don’t wish to overstate things, but if you read such books as BLOOD ON THE STREET, THE BEST WAY TO ROB A BANK IS TO OWN ONE, SOMETHING FOR NOTHING, CONFESSIONS OF A WALL STREET INSIDER, CIRCLE OF FRIENDS, BLACK EDGE, BILLION DOLLAR LOSER, THE SPIDER NETWORK, THE SELLOUT, WHY I LEFT GOLDMAN SACHS, DARK POOLS, LIAR’S POKER, and OTHER PEOPLE’S MONEY, you will want to bury what little money you have in the backyard for safekeeping.

Professor JC de Swaan at Princeton teaches similar students with similar concerns, and he has written a new book called SEEKING VIRTUE IN FINANCE: CONTRIBUTING TO A CONFLICTED SOCIETY that is worth a read. Professor de Swaan hopes to guide his students and others entering careers in finance as to how to behave and which career paths to take so as to lead as virtuous a life as possible under the circumstances.

Although Professor de Swaan believes that “finance is a force for good,” he is well aware of its shortcomings, including that “[w]hether in the hedge fund industry, investment banking, or most other parts of the finance industry, the trend has been toward obsessive short-term profit maximization, often at the expense of clients.”

The book is filled with references to empirical studies that measure the impact of various aspects of the finance industry on the lives we all lead. We like the book especially because Professor de Swaan realizes that behavioral ethics with its emphasis on cognitive and other biases helps explain why it is so hard for good people to do the right thing in so many areas of finance. He notes that “[t]raditional approaches to ethics assume that most people recognize an ethical dilemma when they encounter one. In practice, they often don’t.” Regarding the behavioral ethics research, Professor de Swaan:

• Realizes that the incentive structure in finance often confronts people with large rewards for doing the wrong thing and that the self-serving bias undermines people’s intentions to do good.
• Discusses the numerous conflicts of interest that pervade the finance field, causing finance professionals to constantly have to choose between their own interests and those of their employers on one hand, and those of their clients and customers on the other
• Emphasizes the motivated blindness which often helps people turn a blind eye to wrongful behavior by themselves and others.
• Observes regarding the slippery slope (incrementalism) that “[c]ompanies beset by accounting misstatements often start by adjusting their numbers to manage earnings within the confines of accepted norms in order to meet earnings expectations or other benchmarks and eventually creep into more aggressive, intentional actions that are fraudulent.”
• Notes that situational factors such as time pressure and stress can also facilitate moral failures.
• Is well aware of the power that rationalizations have in enabling people to live with their own bad actions.
• Stresses that overconfidence bias can cause poor decision making (and that men suffer from it more than do women).
• Understands that role morality can cause people to leave their ethical compass at home and while at work focus only on “performing their assigned tasks as well as possible” without regard for ethical concerns.
• Recognizes that finance professionals, like all of us, are prone to the conformity bias (causing us to often follow the herd, even when the herd is acting unethically) and obedience to authority (which may lead us to do what the boss suggests, even if it is not consistent with our actual or our employer’s purported ethical values).

Professor de Swaan offers the “Four Pillars of the Good Life” framework for financial professionals. It is generally straightforward:

• Serve your customers faithfully. He documents that today’s finance professionals often fall far short of this standard, often in service of their own material wants. Finance professionals should ask themselves, for example, whether they are helping to move money to more productive purposes, or just moving it around and taking a cut of every transaction.
• Do not extract value from others. Professor de Swaan demonstrates through empirical research that much of the work that finance professionals do subtracts from rather than adds to the common good. He believes finance professionals should focus on fulfilling roles that support the sustainable functioning of the real economy, and actively improving the underlying business or asset. He argues that “an investment in esoteric, complex derivatives, such as a multi-leg contingent option, will likely not support the production of goods and services in the real economy.”
• Treat colleagues with dignity. In other words: no sexual harassment, no bullying, and the like. You can’t do those things and be a good person. You should, as a manager, help create a firm culture of service to customers and responsibility to other stakeholders. De Swaan applauds servant leadership and recommends that we all guard against the implicit bias we all harbor, which can cause us to unwittingly discriminate.
• Apply your finance skills and resources toward the collective interest. Via philanthropy, volunteering, and government service, finance professionals can help make the world a better place.

Throughout the book, Professor de Swaan profiles individuals he believes demonstrate that finance professionals can check all four of these boxes. He includes as role models:

• Jack Bogle, who revolutionized the asset management industry by founding Vanguard, introducing index funds, and advocating relentlessly for savings to be shifted into passive investments
• Andy Okun and Stephen Modzelewski, who set up a hedge fund designed to always favor the clients’ true interests
• Michaela Walsh, who help found the Women’s World Banking (WWB) network
• Erin Godard, who at age 28 co-founded FinanceYOU, an organization to train aspiring businesspeople in Rwanda in finance and accounting
• Frederic Samama, who helped create the first mainstream low-carbon equity index to encourage investors to put pressure on corporations to improve their climate-related behavior

Professor de Swaan is not the first to attempt to give finance professionals advice as to how to live an ethical life. Other such books that we recommend include: Robert Shiller’s FINANCE AND THE GOOD SOCIETY, John Bogle’s ENOUGH, Hill and Painter’s BETTER BANKERS, BETTER BANKS, and John G. Taft’s A FORCE FOR GOOD and STEWARDSHIP.

 

Sources

Cara Biasucci & Robert Prentice, Behavioral Ethics in Practice: Why We Sometimes Make the Wrong Decisions (2020).

William K. Black, The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry (2005)

John R. Boatright, Finance Ethics: Critical Issues in Theory and Practice (2010).

John Bogle, Enough: True Measures of Money, Business, and Life (2010).

Minette Drumwright, Robert Prentice & Cara Biasucci, “Behavioral Ethics and Teaching Ethical Decision Making,” Journal of Innovative Education 13(3): 431-458 (2015).

David Enrich, The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History (2017).

Charles Gasparino, Blood on the Street: The Sensational Inside Story of How Wall Street Analysts Duped a Generation of Investors (2005).

Charles Gasparino, The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System (2009).

Charles Gasparino, Circle of Friends: The Massive Federal Crackdown on Insider Trading—and Why the Markets Always Work Against the Little Guy (2013).

John Hendry, Ethics and Finance: An Introduction (2013).

Claire A. Hill & Richard W. Painter, Better Bankers, Better Banks: Promoting Good Business Through Contractual Commitment (2015).

John Kay, Other People’s Money: The Real Business of Finance (2015).

Michael Kimelman, Confessions of a Wall Street Insider: A Cautionary Tale of Rats, Feds, and Banksters (2017).

Sheelah Kolhatkar, Black Edge: Insider Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street (2017).

Michael Lewis, Liar’s Poker: Rising Through the Wreckage on Wall Street (1989).

Maureen O’Hara, Something for Nothing: Arbitrage and Ethics on Wall Street (2016).

Scott Patterson, Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System (2012).

Robert J. Shiller, Finance and the Good Society (2012).

Greg Smith, Why I Left Goldman Sachs: A Wall Street Story (2012).

John G. Taft, A Force for Good: How Enlightened Finance Can Restore Faith in Capitalism (2015).

John G. Taft, Stewardship: Lessons Learned from the Lost Culture of Wall Street (2012).

Reeves Wiedeman, Billion Dollar Loser: The Epic Rise and Spectacular Fall of Adam Neumann and WeWork (2020).

 

Videos

Behavioral Ethics: https://ethicsunwrapped.utexas.edu/glossary/behavioral-ethics.

Conflicts of Interest: https://ethicsunwrapped.utexas.edu/video/conflict-of-interest.

Conformity Bias: https://ethicsunwrapped.utexas.edu/video/conformity-bias.

Implicit Bias:  https://ethicsunwrapped.utexas.edu/video/implicit-bias.

Incrementalism: https://ethicsunwrapped.utexas.edu/glossary/incrementalism.

Obedience to Authority: https://ethicsunwrapped.utexas.edu/video/obedience-to-authority.

Overconfidence Bias:  https://ethicsunwrapped.utexas.edu/video/overconfidence-bias.

Rationalizations:  https://ethicsunwrapped.utexas.edu/glossary/rationalizations.

Role Morality:  https://ethicsunwrapped.utexas.edu/video/role-morality.

Self-serving Bias:  https://ethicsunwrapped.utexas.edu/video/self-serving-bias.