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Ethics and Finance: the role of mathematics

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  • Timothy C. Johnson
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    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.

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    File URL: http://arxiv.org/pdf/1210.5390
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    Paper provided by arXiv.org in its series Papers with number 1210.5390.

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    Date of creation: Oct 2012
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    Handle: RePEc:arx:papers:1210.5390

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    1. Irene Van Staveren, 2007. "Beyond Utilitarianism and Deontology: Ethics in Economics," Review of Political Economy, Taylor & Francis Journals, vol. 19(1), pages 21-35.
    2. William N. Goetzmann, 2004. "Fibonacci and the Financial Revolution," Yale School of Management Working Papers ysm19, Yale School of Management.
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    8. Murnighan, J. Keith & Saxon, Michael Scott, 1998. "Ultimatum bargaining by children and adults," Journal of Economic Psychology, Elsevier, vol. 19(4), pages 415-445, August.
    9. Paul Davidson, 1991. "Is Probability Theory Relevant for Uncertainty? A Post Keynesian Perspective," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 129-143, Winter.
    10. Donald MacKenzie, 2008. "An Engine, Not a Camera: How Financial Models Shape Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633671, December.
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    12. Murphy,Anne L., 2009. "The Origins of English Financial Markets," Cambridge Books, Cambridge University Press, number 9780521519946, October.
    13. Alexander Cox & Jan Obłój, 2011. "Robust pricing and hedging of double no-touch options," Finance and Stochastics, Springer, vol. 15(3), pages 573-605, September.
    14. Barry Gordon, 2005. "Aristotle and Hesiod: The economic problem in Greek thought," Review of Social Economy, Taylor & Francis Journals, vol. 63(3), pages 395-404.
    15. David Colander, 2002. "The Death of Neoclassical Economics," Middlebury College Working Paper Series 0237, Middlebury College, Department of Economics.
    16. Hilary Putnam, 2003. "For Ethics and Economics without the Dichotomies," Review of Political Economy, Taylor & Francis Journals, vol. 15(3), pages 395-412.
    17. T. J. Lyons, 1995. "Uncertain volatility and the risk-free synthesis of derivatives," Applied Mathematical Finance, Taylor & Francis Journals, vol. 2(2), pages 117-133.
    18. John B. Davis, 2008. "The turn in recent economics and return of orthodoxy," Cambridge Journal of Economics, Oxford University Press, vol. 32(3), pages 349-366, May.
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