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Ethics and Finance: the role of mathematics

  • Timothy C. Johnson
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    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
    Contact details of provider: Web page: http://arxiv.org/

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    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    2. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
    3. Hilary Putnam, 2003. "For Ethics and Economics without the Dichotomies," Review of Political Economy, Taylor & Francis Journals, vol. 15(3), pages 395-412.
    4. Daniel Beunza & David Stark, 2004. "Tools of the trade: the socio-technology of arbitrage in a Wall Street trading room," Industrial and Corporate Change, Oxford University Press, vol. 13(2), pages 369-400, April.
    5. 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.
    6. Colander, David, 2000. "The Death of Neoclassical Economics," Journal of the History of Economic Thought, Cambridge University Press, vol. 22(02), pages 127-143, June.
    7. Angus A Brown & L C G Rogers, 2010. "Diverse Beliefs," Papers 1001.1450, arXiv.org.
    8. de Roover, Raymond, 1958. "The Concept of the Just Price: Theory and Economic Policy," The Journal of Economic History, Cambridge University Press, vol. 18(04), pages 418-434, December.
    9. William Goetzmann, 2003. "Fibonacci and the Financial Revolution," Yale School of Management Working Papers ysm432, Yale School of Management, revised 01 Mar 2004.
    10. 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.
    11. 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.
    12. J.Keith Murnighan & MIchael Saxon, 1998. "Ultimatum bargaining by children and adults," Artefactual Field Experiments 00100, The Field Experiments Website.
    13. 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.
    14. repec:cup:cbooks:9780521519946 is not listed on IDEAS
    15. Irene Van Staveren, 2007. "Beyond Utilitarianism and Deontology: Ethics in Economics," Review of Political Economy, Taylor & Francis Journals, vol. 19(1), pages 21-35.
    16. Fabio Monsalve, 2014. "Scholastic just price versus current market price: is it merely a matter of labelling?," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 21(1), pages 4-20, February.
    17. 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.
    18. 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.
    19. 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, June.
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