20 Pages Posted: 2 May 2005
Date Written: April 2005
When we talk about ethics we often talk about fairness. What are the rules of fairness that govern financial trading?
Social norms, including rules of fairness, are rules of behavior that are enforced by the community and often make their way into law. Community rules of fairness in financial trading are important to all people since financial markets plays an important part in the economy but they are especially important to investors, both insiders and outsiders, to executives, to investment professionals, to students who plan to become executives or investment professionals, and to regulatory agencies, such as the SEC. I use surveys to elicit rules of fairness from two segments of the community, investment professionals and students. I find that rules of fairness allow one trader to gain advantage over another with information obtained with research, skill or even luck, but they do not allow one trader to gain advantage over another with information, such as inside information, that other traders cannot obtain with research or skill. I find that rules of fairness place special burdens on traders who are well-off and traders who have sure information and that rules of fairness for trading stocks are different from rules of fairness for trading other goods, such as automobiles. I also find differences between the perception of rules of fairness by investment professionals and students.
Keywords: Behavioral finance, fairness, insider trading, ethics
JEL Classification: G14, G24
Suggested Citation: Suggested Citation