Ethics and Finance: The Role of Mathematics

42 Pages Posted: 10 Oct 2012 Last revised: 26 Mar 2014

Timothy C. Johnson

Heriot-Watt University - Maxwell Institute for Mathematical Sciences

Date Written: October 9, 2012

Abstract

This paper presents the contemporary Fundamental Theorem of Asset Pricing as being equivalent to approaches to pricing that emerged before 1700 in the context of Virtue Ethics. This is done by considering the history of science and mathematics in the thirteenth and seventeenth century. An explanation as to why these approaches to pricing were forgotten between 1700 and 2000 is given, along with some of the implications on economics of viewing the Fundamental Theorem as a product of Virtue Ethics.

The Fundamental Theorem was developed in mathematics to establish a 'theory' that underpinned the Black-Scholes-Merton approach to pricing derivatives. In doing this, the Fundamental Theorem unified a number of different approaches in financial economics, this strengthened the status of neo-classical economics based on Consequentialist Ethics. We present an alternative to this narrative.

Keywords: virtue ethics, asset pricing, probability theory, financial crises

JEL Classification: A13, B50, C0, G13

Suggested Citation

Johnson, Timothy C., Ethics and Finance: The Role of Mathematics (October 9, 2012). Available at SSRN: https://ssrn.com/abstract=2159196 or http://dx.doi.org/10.2139/ssrn.2159196

Timothy C. Johnson (Contact Author)

Heriot-Watt University - Maxwell Institute for Mathematical Sciences ( email )

Edinburgh EH14 4AS Scotland
United Kingdom

HOME PAGE: http://www.ma.hw.ac.uk/~timj/

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