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finance ethics

finance ethics In his book Kuhn refers to the term "normal science" and defines it as " research firmly based upon one or more past scientific achievements, achievements that some particular scientific community acknowledges for a time as supplying the foundation for its further practice." (Kuhn, p.10). Essentially it is suggesting that "Normal Science" comprises theories, facts, or data that are created in the present that are based mainly on theories, facts, or data from past experience. An example was the fact that science teachers, books, and curriculums focus on past findings and just teaches those as apposed to allowing students, assistants, or fellow scientists to form totally new theories and data on their own using completely new ideas. Another example was that the old concepts of light was formed in the past and has been pretty much accepted but in the present day and age it is not as compatible as it was before. Normal scientific research concentrates on the past to determine the future. One of the major problems with scientists is they only solve problems they know have solutions. As illustrated in the book this is like puzzle solving. They will attempt only puzzles that they know include all the pieces. This causes resistance in finding new sciences and phenomenon. Scientists focus solely on things that have already been discovered and try to make them better and more accurate instead of focusingon newer forms of methodologies and theories. This idea is further discussed with the ideas of revolution. The next subject matter that Kuhn's deals with is the paradigm. Kuhn's use of the word throughout the book clearly makes it significant to his studies. " In the absence of a competent body of rules, what restricts the scientist to a particular normal-scientific tradition? What can phrase 'direct inspection of paradigms' mean?" (Kuhn, pp.44). What this means is that scientists tend to group particular problems with others because to classify is tradition in the field of science. If something has occurred in the past and a similar event has occurred in the present, the present event will be labeled as the past event was. This is a basic example of how the paradigm works in the field of science. "Paradigms could determine normal science without the intervention of discoverable rules." (Kuhn, pp.46) New theories and ideas are constantly being introduced in the science world. When dealing with these it is important to distinguish novelties of fact from novelties of theory. For example, when something is invented or discovered, there may be people who will come up with a theory based on the others discovery. They may actually say they came up with the discovery before the other person did. There are millions of theories and in finding the true facts one must be careful. Sometimes it is hard to distinguish the facts from fiction. As science develops, paradigms may change. Once something has been discovered, other scientists will work on the newly found discovery and progressively make it more advanced over time. There are things that have been discovered in the past that have changed paradigms dramatically. On the other hand, things such as gravity have stood the test of time and remains more stable. When a paradigm is changed, it is always at the same time with a decision to accept another one. "To reject one paradigm without simultaneously substituting another is to reject science itself." (Kuhn, pp.79). To reject something for no reason without having a replacement makes no sense at all. "Once a first paradigm through which to view nature has been found, there is no such thing as research in the absence of any paradigm." (Kuhn, pp.79). If that point is reversed it says, there is no such thing as research without counter instances. They both illustrate the fact that once a paradigm is set, any research of changing in that area will have some effect on the paradigm. When confronted with crisis, or a need for change, scientists take a new attitude towards paradigms. To change what is considered "normal" science is a significant accomplishment. One should want to be absolutely sure when attempting to change a paradigm. When a paradigm is changed, a scientific revolution has occurred. If there are no advances with new technologies, each individual and the world as whole would not be able to expand there horizons. It is almost as if a revolution is necessary. Change is usually welcome, but not always pleasant. When a group challenges another groups paradigm, this can lead to lengthy debates that two scientific schools disagree about what is a problem and what is a solution, they will inevitably talk through each other when debating the relative merits of their respective paradigms." (Kuhn, pp. 109). Each group will naturally side with their paradigm and defend it. They will not stand for someone else to challenge their theory. But they must because revolutions can change the world and the way we see it. Now that a paradigm has been defined and the power it can carry when one shifts or when a completely new paradigm is formed has been described, we can apply it to anything we want. In our case it will be to the world of finance. "Within this discipline (finance) ‘self interest' has come to be defined in very narrow, and very specific, terms: "individuals always prefer more wealth to less" and act "with, if necessary, guile and deceit. This concept characterizes self-interest as the narrowly individualistic and opportunistic pursuit of material wealth, to the exclusion of all other motivations. I label this behavioral concept the ‘finance paradigm'. (Dobson,pp.3) What Dobson means by this is that the financial paradigm that exists is one that is fueled by the maximization of personal material gain at any cost. And to most people this is the entire business paradigm. But so what? What is the problem? According to Milton Friedman the social responsibility of business is to make a profit and nothing more. All you need to do is follow the rules of the game. Dobson says the problem is the lack of trust that exists in the financial world these days. Managers are no longer interested in any issues other than that of personal gain. Laws are broken and people are negatively effected by decisions that are made to maximize and only to maximize wealth. And according to Dobson this problem is said to be contractual. In the regards to contracts (agreements between two or more parties) there are two main types that exist. The first being explicit contracts which are defined as "those that appear in writing and lend themselves to legal enforcement (albeit at a cost)." (Dobson,pp.14) The other form is implicit contracts which are defined as contracts that "do not readily lend themselves to legal enforcement; they are, as Bradford Cornell and Alan Shapiro put it, ‘too nebulous and state contingent to reduce to writing at a reasonable cost'." (Dobson,pp. 14) With explicit contracts being enforceable (for the most part) it is implicit contracts that become our main concern. These usually fall in the forms of commitments, handshakes, or promises. Basically, implicit contracts only work if the parties involved are responsible, honest, and ethically sound. Consequently, in the existing financial world with the goal of materialism at any cost, the individuals do not have these characteristics that are required for implicit contracts to work. Furthermore, as J.B. King states "As a result of our economy's increasing complexity, it is becoming more difficult and expensive to spell out and enforce mutual responsibilities through detailed contracts and administrative hierarchies...Conditions of trust are therefore becoming increasingly crucial to competing-and cooperating-in today's business environment." (Dobson,pp. 14) To increase the severity of the problem these responsible, honest, ethical contracts are becoming more common and in many cases mandatory. So, where is the financial paradigm supposed to go from here? What shift will help in remedying this growing contractual dilemma? According to some reputation could be the key ingredient missing from the current paradigmatic financial pie. The reputation solution is the concept of using manager or company reputations as a means of deciding with whom you will enter into an implicit contract. The better reputation for validating a contract an entity has, the more likely another will enter one with them and vice a versa. But, if the reputation concept worked "then we have no economic need to challenge or move beyond the finance paradigm. The ill effects of opportunism will be successfully reined in by agents' desire to build and maintain their reputations." (Dobson,pp.39) But this desire for good reputations does not exist. What does exist in the present paradigm maybe managers "rationally act in a way that honors contracts, for example they may build a reputation. They may not, however, be rationally motivated primarily by a desire to honor contracts since this is not a material objective." (Dobson,pp. 14) Managers may have a good reputation but not because they are responsible, honest, and ethically sound but because it may be a way to stimulate their opportunistic passion. Consequently, reputation is not a solution to the problem, rather a cloud of dust hiding the core of the issue. As stated before, the root of the finance paradigm is the goal of personal maximization in the form of materialistic gain and growth. In order to shift the paradigm the goal of the discipline needs to be shifted. "In order to rationalize intrinsic honesty, our focus must shift from material payoffs accruing to the agent to the agent's fundamental concept of rationality itself. We must, in essence, move beyond economic rationality toward a broadened rationality construct that, albeit a Nirvana to some, is no less real." (Dobson,pp. 42) In other words, the paradigm must shift from wealth maximization or financial rationality to rationality itself. But what is rationality? What the last paragraph leaves us with is the fact "that people can be slaves to the maximization of self- interest." Which "leaves open for our moral evaluation whether they should be slaves to the maximization of self-interest." (Dobson,pp 3) In other words morals, ethics, and what is right and wrong lies in the eyes of the beholder. There is no ultimate ethical truth or moral path to follow. Each person must decide which way is right for them and in the process take into consideration those surrounding them. Dobson says the firm is a "human organization" and if a shift in the financial paradigm is to take place there is going to have to be a change of goals. Instead of opportunism being the focus, the pursuit of moral excellence will have to take its place. And of course this leads us to another problem which we stated above, "in the pursuit of moral excellence there are no absolute ethical rules." (Dobson,pp.142) So, how do we change the focus of the paradigm or more importantly the humans that make it up? And who is to determine what ethical path to take? These questions and others like it cannot be answered but in order for a shift to happen there must be a beginning, a new idea, a separation from the existing paradigm. We know from Kuhns that each group will naturally side with their paradigm and back it up. They will not stand for someone else to challenge their theory. But they must because revolutions can change the world and the way we see it. A separation can take place and it will when the infrastructure of the business world is altered and the way people learn and carry themselves in the business world is changed. "North notes: ‘If the highest rates of return in a society are for piracy, then organizations will invest in knowledge and skills that will make them better pirates." (Dobson,pp. 147) Furthermore, if the future individuals of the financial world are told that the ultimate thing to achieve is personal materialistic gain then they will do every thing to accomplish this. In contrast to that, if these same individuals are taught and brought up around others that claim that in order to reach personal Nirvana one must be honest and ethically responsible, they will be in a position to shift the existing opportunistic paradigm and increase their level of incorruptibility. A final example of this takes place in the class room. If someone (who has never cheated before) is in a class full of students that cheat on tests, over time, the new student is likely to change their beliefs on the matter and end up cheating. They end up being a product of their surroundings. On the other hand, if someone ( who has cheated on many tests) is in a class full of students who never cheat and look down on people that do, over time, the new student is likely to stop cheating on tests. Another product of surroundings. Consequently, if we can fill the financial world, through education, with students who condemn cheating, lying, and irresponsible behavior and praise trust and rationality, we can shift the paradigm and in the process change the financial world. Bibliography:

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