Putting Integrity into Finance: A Purely Positive Approach
Michael C. Jensen
Harvard Business School; Social Science Electronic Publishing (SSEP), Inc.; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
March 5, 2014
Harvard Business School NOM Unit Working Paper No. 12-074
Barbados Group Working Paper No. 12-01
The seemingly never ending scandals in the world of finance with their damaging effects on value and human welfare (that continue unabated in spite of all the various efforts to curtail the behavior that results in those scandals) argues strongly for an addition to the current paradigm of financial economics. We summarize here our new theory of integrity that reveals integrity as a purely positive phenomenon with no normative aspects whatsoever. Adding integrity as a positive phenomenon to the paradigm of financial economics provides actionable access (rather than mere explanation with no access) to the source of the behavior that has resulted in those damaging effects on value and human welfare, thereby significantly reducing that behavior. More generally we argue that this addition to the paradigm of financial economics will create significant increases in economic efficiency, productivity, and aggregate human welfare.
In our positive theory of integrity, we define integrity as the state of being whole, complete, unbroken, unimpaired, sound, in perfect condition. Thus, integrity as we define it is not a virtue; there is nothing inherently good or bad about it. Something is either whole and complete (etc.) or it isn’t. We go on to define what must be whole and complete for 1) an object or for 2) a system to be in integrity. We also define what must be whole and complete for 3) a human being (a person) or for 4) any human entity (such as a corporation) to be in integrity.
As is the case with any positive phenomenon, there are effects caused by actions related to that phenomenon. With the positive phenomenon of gravity for example, the action of stepping off a cliff will cause an effect (whether one likes the effect or not). Likewise, action that is consistent or inconsistent with the nature of integrity as a positive phenomenon will also cause an effect (again, whether one likes the effect or not).
Because integrity has generally been treated as nothing more than a virtue (a normative phenomenon), the damaging effects of out-of-integrity actions are assigned to causes other than out-of-integrity actions – that is, these damaging effects are assigned to false causes. This makes the actual source of the damaging effects of out-of-integrity actions invisible to us. As a result, in spite of all the attempts to police the false causes of these damaging effects, the out-of-integrity actions that are the actual source of these effects continue to be repeated.
We go on to argue that there are large effects (increases in workability, value, and quality of life) to be realized by putting integrity as a positive phenomenon into the theory and practice of finance. You the reader must judge for yourself if these effects are desirable.
Number of Pages in PDF File: 72
Keywords: Integrity, Fraud, Gaming, Morality, Ethics, Legalityworking papers series
Date posted: April 5, 2012 ; Last revised: March 5, 2014
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
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