Archive for the ‘investing’ Category
Unethical Innovation
Filed under: advertising, banking, complexity, consumers, finance, investing, regulations, risk, technology, Uncategorized |
Comments (8) 
Innovation is a hot topic these days, and has been an important buzzword in business for some time. As Simon Johnson and James Kwak point out in their book, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, innovation is almost by definition taken to be a good thing. But, they also point out, it’s far from obvious that innovation is in fact always good. They focus especially on financial innovation, which they say has in at least some instances led to financial instruments that are too complex for purchasers to really understand. Innovation in the area of finance — often lionized as crucial to rendering markets more efficient and hence as a key driver of social wealth — is actually subject to ethical criticism, or at least caution. And the worry is not just that particular innovations in this area have been problematic. The worry is that the pace of innovation has made it hard for regulators, investors, and ratings agencies to keep up.
In what other cases is “innovation” bad, or at least suspect? One other example of an area in which innovation might be worrisome is in advertising. Consider the changes in advertising over the last 100 years. Not only have new media emerged, but so have new methods, new ways of grabbing consumers’ attention. Not all of those innovations have been benign. When innovative methods have been manipulative — subliminal advertising is a key example — they’ve been subject to ethical critique.
Some people would also add the design and manufacture of weaponry to the list. But then, almost all innovations by arms manufacturers have some legitimate use. Landmines and cluster bombs are controversial, largely because of their tendency to do too much “collateral dammage” (i.e., to kill civilians). But they do both have legitimate military uses. So it’s debatable whether the innovation, itself, is bad, instead of just the particular use of the innovation.
Are there other realms in which innovation, generally taken to be a good thing, is actually worrisome? One caveat: the challenge, here, is to point out problematic fields of innovation without merely sounding like a luddite.
Insider Trading at the FDA
Filed under: conflict of interest, employees, ethics, finance, intellectual property, investing, law, science, trust, white collar crime |
Comments (3) A scientist employed by the US Food and Drug Administration has been arrested and charged with insider trading.
Here’s the story, from Diana B. Henriques at the New York Times: U.S. Chemist Is Charged With Insider Stock Trades
A 15-year veteran of the federal Food and Drug Administration and his 25-year-old son were arrested on Tuesday and charged with systematically using confidential information about pending drug applications to reap millions in illegal trading profits since 2007.
As part of its drug-approval process, the FDA is given sensitive information by companies seeking such approval. And the status of a company’s application within the FDA’s own decision-making is itself sensitive information. Since FDA approval is essential to getting a drug to market, the announcement that a company’s drug has been granted, or denied, approval by the FDA can have a huge impact on the value of a company’s stock. And what FDA chemist Cheng Yi Liang did is to use information available only to FDA insiders to make profitable trades on the stock of companies then seeking FDA approval.
Just what was so wrong with what went on here?
In a statement announcing the case, Lanny A. Breuer, the assistant attorney general for the criminal division, said: “Cheng Yi Liang was entrusted with privileged information to perform his job of ensuring the health and safety of his fellow citizens. According to the complaint, he and his son repeatedly violated that trust to line their own pockets.”
Now Mr Breuer is clearly engaging in a bit of prosecutorial rhetoric. He’s right of course that Cheng Yi Liang was entrusted with privileged information, but there’s no obvious reason to think that his use of that information for personal gain jeopardized anyone’s health or safety. But fair enough: Mr Breuer is playing his role in an adversarial system, and that licenses a certain amount of hyperbole.
But what really is wrong with the kind of insider trading that Cheng Yi Liang engaged in? The precise worry about insider trading is the subject of some debate, and I’ve blogged about that before. (See: Ethics of Insider Trading.)
There are several ways we could get at just what was unethical about what Cheng Yi Liang did. One worry is that he profited unjustly, gaining money that he didn’t earn and had no right to. Also, in engaging in insider trading, he traded on information not accessible to others. That means that the people he traded with were at an unfair advantage, and likely lost money as a result. It also means that, subject as it was to significant information asymmetries, the market in which he traded was rendered slightly less efficient, as a whole.
There is of course another ethical worry: if chemists working for the FDA take a personal financial interest in the fate of various approvals, that could quite easily corrupt the work they do. In other words, it puts such a chemist into a conflict of interest. In a conflict of interest, what is fundamentally at stake is our trust in an individual’s judgment. If FDA scientists have a personal stake in their scientific work, then we have reason to doubt their judgment. And, worse, if the judgment of FDA scientists becomes subject to doubt, then the public ends up having a reason (though perhaps not a sufficient reason) to doubt the work of the FDA as a whole.
Financial Speculation & Ethics
Filed under: complexity, CSR, definitions, economics, finance, investing, pricing, profits, regulations |
Leave a comment Friday I gave a talk as part of a terrific workshop on the ethics and law of financial speculation, held at the University of Montreal. (The event was co-sponsored by U of M’s Centre for Business Law and the Centre for Research in Ethics.)
As I mentioned in a posting last week, financial speculation is the subject of some controversy. Indeed, there has been plenty of discussion of regulating various forms of speculation, though whether that is possible and how best to do so is also subject to controversy.
Very roughly, “speculation” can be thought of as involving any of a range of forms of relatively high-risk investment. In a way, it is the exact opposite of a slow, safe investment such as buying government savings bonds. But it’s also different from pure gambling: in most forms of gambling, you have no reasonable expectation of making money. You might well win big, and it’s nice if you do, but really all you can expect is to have fun playing the game. Speculation on the other hand involves taking what are hopefully well-informed risks, in the hopes of exceptional returns.
Here are 3 stereotypical examples of speculation:
- Imagine that a wheat farmer is considering whether to plant wheat an additional, previously-unplanted, field. Imagine that the farmer’s total cost for doing so would be $5/bushel of wheat. If the current price of wheat is hovering right around the $5 mark, that turns planting into a risky proposition. The risk of a loss might make planting just too unattractive. Now imagine a speculator comes along and is willing to take that risk, so she offers the farmer $5.25/bushel for the wheat that has not even been planted yet. With the promise of a modest-but-guaranteed profit in hand, the farmer plants the crop. If, at harvest time, the price of wheat has gone up to $6/bushel, the speculator stands to make a tidy profit. If the price has gone down to $4/bushel, the speculator suffers a loss — but she’s in the business of speculating precisely because she has the resources to absorb such losses, and will just hope that her next investment pays off better.
- Imagine someone whose job is to invest in futures contracts on commodities such as oil or gold. A futures contract is basically a commitment to buy a specified quantity of something, at a specified price, at some date in the future. The example above involved a kind of futures contract, except in that example the investor actually did intend to buy and take possession of the farmer’s wheat once harvested. But in the vast majority of futures trading, nothing but paper ever changes hands. If a trader finds that other traders have been paying above-market prices for oil futures, she might decide that it’s worth buying some herself, in the hope that the price of oil will continue to go up because of this demand. Other traders are likely to notice, and imitate, her behaviour, with a net effect of pushing oil prices up. None of this needs to reflect any underlying change in consumer demand for oil, or any change in oil’s supply. It can all happen as the result of a combination of hunches about the future of oil and a dose of herd behaviour.
- Imagine I have a dim view of the future prospects of a company, say BP, so I decide to “short” (sell short) shares in BP. What I do is I borrow some shares in BP, say an amount that would be worth $1,000 at today’s prices. I then sell those borrowed shares. If all goes as I expect it will, the price of BP shares may drop — let’s imagine it drops 25%. I can then buy enough shares in BP, at the reduced price ($750 total), to “return” the shares to the person I originally borrowed them from. And I get to pocket the $250 difference (minus any expenses). Basically, this form of speculation — short selling — is unlike standard investments in that it involves betting that a company’s shares will go down, rather than up, in value.
There is disagreement among experts regarding just what the net effect of speculation (or indeed of particular kinds of speculation) is likely to be. Some think that speculation, as a kind of artificial demand, has the tendency to increase prices and perhaps even to result in “bubbles” that eventually burst, with tragic results. But the evidence is unclear. In particular cases, it can be very difficult to tell whether a) speculation caused the inflationary bubble, or whether b) some underlying inflationary trend spurred speculation, or whether c) it was a bit of both. And even if it’s clear that some forms of speculation sometimes have such effects, it’s not clear a) that speculation has negative effects often enough to warrant intrusive regulations, or b) that regulators will be able to single out and regulate the most worrisome forms of speculation without stomping out the useful forms.
And defenders of speculation do point out that at least some forms of speculation have beneficial effects. Speculators of the sort described in my first example above take on risk that others are unable to bear, and hence allow productive activity to take place that otherwise might not. They also add “liquidity” to markets by increasing the number of willing buyers and sellers. Speculators, through their investments, can also bring information into the market and thus render it more efficient. When one or more speculators takes a special interest in a given commodity, it is likely to be on account of some special insight or analysis that suggests that there will be an increased need for that commodity in the future. In other words, in the best cases at least, expert financial speculation isn’t idle speculation — it is well-informed, and informative.
Of course, it’s also worth pointing out that pretty much any technology or technique can be used for good or for evil. The techniques of financial speculation can be used to attempt to manipulate markets or to defraud consumers. Whether the dangers of such uses outweigh other considerations is up for debate.
But from the point of view of ethics, it’s worth at least considering exercising caution in some areas. Perhaps speculators with a conscience, for example, should be particularly risk-averse when it comes to commodities that have a very direct impact on people’s wellbeing, such as food. Recently Andrew Oxlade, writing for the financial website “ThisIsMoney”, asked Is it ethical to invest in food prices? As Oxlade notes, at least some critics believe that recent surges in food commodity prices have at least something to do with the activities of traders engaging in speculative trades.
Oxlade offers this advice to investors:
To sleep easier at night and still get exposure to this area, you may want to consider investing in farming rather than in food prices via derivatives. In fact, your money may even do some good.
———————-
p.s. thanks once again to the organizers of the workshop mentioned above, namely professors Peter Dietsch and Stéphane Rousseau.
————
Note also: If you’re interested in this topic from a professional or academic point of view, then this book should be on your bookshelf: Finance Ethics: Critical Issues in Theory and Practice, edited by John Boatright.
Madoff, Accomplices, and Complicity
Filed under: accountability, excuses, finance, fraud, investing, white collar crime |
Comments (1) It takes two to tango. How many does it take to sustain a ponzi scheme?
See this tantalizing piece by Diana B. Henriques, for the NY Times: From Prison, Madoff Says Banks ‘Had to Know’ of Fraud
In many ways…Mr. Madoff seemed unchanged. He spoke with great intensity and fluency about his dealings with various banks and hedge funds, pointing to their “willful blindness” and their failure to examine discrepancies between his regulatory filings and other information available to them.
“They had to know,” Mr. Madoff said. “But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know….’”
Of course, as Henriques notes, “Mr. Madoff’s claims must be weighed against his tenuous credibility.”
But Madoff’s claims that others, including financial institutions and sophisticated investors, “had to know” something was wrong will ring true to anyone who knows the Enron story in detail. For a wonderful, if exhausting, tour through the Enron scandal, see Bethany McLean and Peter Elkind’s Enron: The Smartest Guys in the Room. As McLean and Elkind make clear, Enron’s shenanigans only went on as long as they did because a lot of people, at a lot of financial institutions (and accounting firms and law firms) spent years and years with their eyebrows raised but kept their mouths shut.
Socially Responsible Investing & Value Alignment
Filed under: corporate citizenship, CSR, ethics, finance, investing, stakeholders, sustainability, trust |
Comments (11) Socially responsible investing (SRI) is a big topic, and a complex issue, one about which I cannot claim to know a lot. The basic concept is clear enough: when people make investments, they send their money out into the world to work for them. People engaged in SRI are trying to make sure that their money is, in addition to earning them a profit, doing some good in the world, rather than evil.
There are a number of kinds of SRI. For example, there are investment funds that use “negative screens” (to filter out harmful industries like tobacco), and there are “positive investment” (in which funds focus on investing in companies that are seen as producing positive social impact). We can also distinguish socially-responsible mutual funds from government-controlled funds, such as pension funds.
(For other examples, check out the Wikipedia page on the topic, here.)
Setting aside the kinds of distinctions mentioned above, I think we can usefully divide socially responsible investments into two categories, from an ethical point of view, rooted in 2 different kinds of objectives.
On one hand, there’s the kind of investment that seeks to avoid participating in what are relatively clear-cut, ethically bad practices. For example, child slavery. Trafficking in blood diamonds might be another good example. Responsible investment in this sense means not allowing your money to be used for what are clearly bad purposes. In this sense, we all ought to engage in socially-responsible investment.
(Notice that investments avoiding all child labour do not fall into the above category, because child labour, while always unfortunate, is not always evil. There are cases in which child labour is a sad necessity for poor families.)
On the other hand, there’s what we might call “ethical alignment” investments, in which a particular investor (small or large) attempts to make sure their money is invested only in companies or categories of companies that are consistent with their own values. Imagine, for example, a hard-core pacifist refusing to invest in companies that produce weapons even for peace-keeping purposes. Or picture a labour union investing only in companies with an excellent track-record in terms of labour relations. In such cases, the point is not that the corporate behaviour in question is categorically good or bad; the point is that they align (or fail to align) with the investor’s own core values.
I’m sure someone reading this will know much more about SRI than I do. Is the above distinction one already found in that world?
The Business Ethics Blog 