It”s time to bring morality back into finance – and time for business leaders to take risk seriously.
This crisis is a moral crisis. Instruments and techniques can be used for the good or for its opposite. The mathematical models of finance we have developed do not include the human implications they lead to. We, as academics, have not paid attention to the moral implications of the financial engineering we promoted, while our theories have been the true engine of the changes of practice. It is time to reinstate moral reflection in financial thinking, as is done in other sensitive areas (biology, medicine and others). Finance is not an abstract mathematical theory but truly a social structure with a deep impact on the system and the individuals in the system.
Financial engineering pervaded practices from the homeowner (accepting complex subprime loans) to the originator (the bank) to the separation from underwriting (pushed back to the investor via securitization) to the structuring and its evaluation (by investment banks and rating agencies). All throughout, this financial engineering had deep human implications that have not been analyzed. And few finance academics who specialized in advanced financial techniques, despite their deep knowledge of financial engineering, have mastered the understanding of what these practices lead to in human behaviors and choices.