Question

How are ethics and finance related?

a. What is finance with and without ethics?

b. What are some core reasons why many look at finance with ethical skepticism?

c. Are these reasons sound or misconstrued?

Answer 1

Finance is a branch of economics that deals with the management of the money and in finance a significant part of the time you are dealing with someone else money so ethics has to be an integral part of all those dealings because without that there would be no trust and the financial system will collapse.

a) Ethics should be an integral part of dealing with all the activities because without ethics there would be no trust and the entire financial system is based on the trust. People deposit money in the banks because they have faith that their money is protected and banks use that funds to lend money and they believe that the borrower will return the money so without the ethics there would not be any trust and the financial system will not survive

b) Many people look at ethics in finance with skepticism because the people who are given the responsibility of handling others money often benefit themselves exorbitantly at the expense of the customer money and the customer loses money in the process, this raises the question of agency relationship. Sometimes banks take risk with the depositor’s money which are far beyond what they would have done if it was their money. Some people in financial sector benefitting with private information is another reason for the skepticism also known as insider trading.

c) To at certain extent theses reasons are valid and sound. This is because in real world there are many cases of insider trading where some individual benefitted with insider information at the cost of many investors and later got away without paying any significant fine. It is also because money is a delicate issue and greed is an important part of the human nature which often is seen in many cases.