2nd St Cross Seminar TT13: Ethics In Finance: A New Financial Theory For A Post-Financialized World

The neo-classical assumption that economic agents are rational profit maximizers has, over decades, become uncritically accepted as the norm and the truth about people's economic behavior in western-style capitalist economies. The lecture demonstrates how economic agents are assumed to be rational profit maximizing individuals has become the ethic i.e., economic agents ought to be rational, profit maximizing individuals. This resulting ethic is an impoverished value system, inadequate for an increasingly complex, global financial system. Modern finance theory is no more a complete version of truth than is Marxist dialectical materialism, or postmodernist deconstructionism. If a theory (MFT) can demobilize ethics in finance, then a theory also can activate ethics in finance. We need to add to the current popular theory of finance i.e. MFT so that it includes principles of both finance and ethics. One way to develop a new theory is to synthesize the three extant financial theories - the still dominant Modern Finance Theory; the emerging theory of behavioral finance; and the still inchoate theory of Islamic finance. Each of the three theories has its own strengths and focuses on one aspect of economic reality. Modern finance theory is robust on economic and quantitative modeling and forecasting. Behavioral finance describes and takes into account the human psychological basis of decision making in financial markets. Islamic finance theory is unapologetically directed by ethical values. Islamic finance focuses on finance as it is useful in supporting and helping the growth and development of the community and its people. Is it possible to have a financial theory that is the synthesis of the three perspectives of finance?