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Quantitative Method in Finance: From Detachment to Ethical Engagement

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Abstract

Quantitative analysts or “Quants” are a source of competitive advantage for financial institutions. They occupy the relatively powerful but often misunderstood role of modeling, structuring, and pricing complex financial instruments in the capital markets. But Quants often function in a discipline free from ethical burdens. Models used to price complex instruments are usually beyond the mathematical understanding of financial sector participants who rely heavily on the integrity of the Quant who built them. Although there has been some attempt to cover the ethics of mathematics applied to the capital markets, designing a set of rules to guide the ethical behavior of Quants cannot be made explicit and remains inexpressible. Because Quants generally experience a sense of detachment from moral obligation, there is a growing need to convert moral detachment into engagement. Our framework is indebted to key elements of Wittgenstein’s practical ethics philosophy and Rawls’ justice principle. The burden of balancing justice as fairness as defined by Rawls with the inability to explicitly articulate ethical rules as defined by Wittgenstein must fall to the Quant. We propose that the threshold delineating the barrier between ethical detachment and engagement can only be defined by the Quants themselves. It is their moral duty to disclose their level of ethical engagement when their models are put into practice.

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Notes

  1. Doeblin’s framework of stochastic processes with continuous paths was consistent with Kolmogorov's analytic theory for Markov processes but he was drafted to go to the front during World War II. To avoid sharing his ideas with the Nazis Doeblin first burned his notes and committed suicide. Some of his notes, however, were kept safe by the National Academy of Science of France. The academy safe was opened in May 2000 and it was then that the extent of his work became apparent (Jarrow and Protter 2004).

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Acknowledgment

I wish to thank the editor and an anonymous reviewer for their valuable comments and inputs.

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West, J. Quantitative Method in Finance: From Detachment to Ethical Engagement. J Bus Ethics 129, 599–611 (2015). https://doi.org/10.1007/s10551-014-2193-9

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