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1 Introduction, At the beach on Australia what is the problem. Actually the Problem is, There has been a breakdown of trust in financial markets. A renewal in the social contract of finance is needed. This requires a change in culture, But what does this mean. How to find out what this means, and what to do about it. go back to Oxford, ask people to dinner in College. set up a seminar within the Balliol Interdisciplinary. Institute and then edit a book, 2 Capital Failure, The Problem. There has been a breakdown of trust, A renewal in the social contract of finance is. Requires a change in culture, But what does that mean. Our research on this problem, Builds on Capital Failure N Morris and D Vines. OUP 2014 and Firm Commitment C Mayer, Research is interdisciplinary drawing on. neoclassical economics behavioural economics, philosophy history evolutionary biology law and. regulation, Aim is to provide practical guidance on how to. achieve change through action at individual firm, and regulatory and legal level. trustworthiness is central, Our First Key Claim, Econ 101 is a key problem. A conception of the world as composed of selfish interested individuals. proceeding in a selfish manner, This led direction to the First Fundamental Theorem of Welfare Economics. That led directly to the efficient market hypothesis. that allowed untrustworthy behaviour, led to the spectacular errors of light touch regulation. Our Second Key Claim, Pursuit of selfish objectives by self interested individuals will not give rise. to trustworthy outcomes, It only gives rise to weak trust by contrast we seek strong trust. We believe that these ideas provide us with the intellectual equipment to go. beyond box ticking in thinking about ethics and financial reform. 3 Encouraging Trustworthy Behaviour, Trustworthiness requires three things. competence, truth telling about relevant facts, promise keeping. Modern economists have argued that trustworthy behaviour can be. sustained by self interested individuals acting in selfish ways through the. pursuit of reputation in the context of repeated games. Philosophers have long thought that such reputation seeking behaviour only. enables a shallow and unreliable form of trust to emerge. Such behaviour is vulnerable to cheating, Also vulnerable to possibility that promises will be abandoned if things change. Which changes will turn out to be material in a court of law. Like these philosophers we do not believe that a trustworthy financial sector can. re emerge merely as a result of individuals and firms carrying out calculations. about how to pursue and defend their reputations, But not all researchers agree with this see Section 8 below. We give this kind of trust the name weak trust, Strong trust is needed. Other regarding motivations can sustain what we call strong trust. c f David Hume and Adam Smith, How selfish soever man may be supposed there are evidently some principles in. his nature which interest him in the fortune of others and render their happiness. necessary to him though he derives nothing from it except the pleasure of seeing. it Adam Smith The Theory of Moral Sentiments 1759, These motivations can take form of altruism or the desire for approbation or. Amartya Sen calls this sympathy, Procedural motivations are sometimes sufficient. Framing can support strong trust and so help to improve culture. Some activities eg selling spaghetti only need weak trust. But many for example doctors and fund managers do need to be trustworthy because. their patients and clients need to be able to rely on them in the longer term. Framing can identify where and where ethical principles are necessary. and where other regarding obligations may be appropriate 9. bad behaviour inefficient or outrageous, A comparison of approaches. The conventional approach the problem with financial institutions is. something which is to be solved inside institutions by using reforming. incentives within a framework of law and regulation. Our approach it is it something which needs to be solved by strengthening. professionalism, Our approach is similar to that of the Archbishop of Canterbury. Justin Welby proposes what is in effect moral education. Our thinking about the endogeneity of framing may give us a way of thinking in. a manner consistent with his views, One does not need to be religious to have a view that outcomes for others. But it may be difficult to walk on two legs at once. The conventional approach is in danger of crowding out our approach. cf Michael Sandel 2012 What Money Can t Buy, Behavioural evidence of such crowding out. child care example putting a price on bad behaviour can remove the. moral obligation to behave well, What role for legal enforcement if both approaches are in play. an alliance amongst reformers, Many religious people has expressed dismay at financial misbehaviour. But the problem needs to be approached from a secular standpoint. Of course we can agree with Pope Benedict that morality is ignored by the. economic approach to this problem, But is it unhelpful in a secular society to think of policies of financial. reform as being underpinned by religious belief, Statements like the following not helpful as an underpinning for reforms. Scripture enables us to derive precepts which will guide good behaviour. Such precepts are not of use to those who are not believers. Religious scripture should instead be used to contribute to the reform. discussion in the way that any other written source can be used. What is very helpful is that those who are religious set out precepts. for good behaviour can be underpinned in secular ways i e which can. be justified according to secular morality, Act utilitarianism including appeal to altruism esteem approbation. Kantian duties connected to a contemporary appeal to values. 4 An research strategy and an, implementation strategy. In Capital Failure we set out a four step implementation strategy. designed to promote trustworthiness i e to promote competence. truth telling and promise keeping The components of this strategy. 1 the definition of appropriate obligations, 2 the identification of corresponding responsibilities. 3 the creation of mechanisms by which these responsibilities are carried. out and enforced and, 4 the holding to account of those involved in an appropriate manner. Our continuing research seeks to find ways in which these four components. might pursued at three levels of society, in relation to the individual. In relation to the corporate firm and, In relation to society at large. three levels of enquiry, 1 Understanding the underpinnings of strongly trustworthy behaviour at the. individual level by those who work in the financial services industry. Building professionalism, Research psychology in behavioural economics moral philosophy and ethics. 2 Identifying how corporate firms within the financial sector might become. institutions in which such strongly trustworthy behaviour can take place. Changing Corporate governance, Research corporate governance and industrial archaeology. 3 Examining how such strong trustworthiness might emerge in the. relationships between the financial sector and the wider society at large. Moving towards a greater degree of self regulation within a supportive legal. It will also include work on how the legal and regulatory system impacts on. trustworthiness and on which legal and regulatory tradition is best suited to this. 5 The Individual Level, fostering professionalism, Trustworthy behaviour at the personal level requires that those in. finance behave in a professional way as most doctors do. Criteria suggested by the philosopher Robin Downie 1990 are helpful in. defining what this means A professional, 1 Of course possesses specialised knowledge and specific skills based upon a. particular knowledge base, 2 In addition provides a service to clients which is sustained by a continuing. relationship built upon a sense of concern for the interests of clients carried out. with integrity, integrity is a character trait cannot be successfully pursued as an end in. itself or effectively feigned by a selfish individual. 3 Is well educated beyond his her narrow field so that good judgement can be. brought to any relationship with a client, 4 Is independent of sectional or other interests. 5 Is able to provide an authoritative voice in public discourse in his her subject area. Our research will explore how to achieve this for individuals in various. parts of the financial services industry, the role of framing and social norms. Whether a person will act in a professional manner in relation to a. particular activity depends on how the activity in question is framed. Individuals have other regarding motivations, including the desire for esteem for approbation of others and genuine altruism. But individuals of course also have selfish motivations of the kind which. economists have long emphasised, Sustaining professionalism in relation to certain activities eg being a doctor. requires that these activity be framed as one in which other regarding. obligations are relevant, rather than as one in which it is satisfactory to be selfish. Norms of behaviour will constrain the way individuals frame their tasks. Norms can ensure that individuals adopt other regarding motivations for particular. problems and can be incorporated into codes of conduct. It is important that norms reference values this effectively means articulating what. these other regarding obligations are otherwise they merely become arbitrary lists. of proscribed actions, The process of developing norms and codes of conduct can support the.