Tuesday, November 9, 2010

Double Standards and Finance

A lot of people on Main Street wonder how people on Wall Street can manipulate people the way they do and think nothing of it. The standard explanation is that it's about money: people on Wall Street are greedy so they do immoral things knowingly to get more money. That is certainly part of the story but I think it's a smallest part then people think.

The bigger thing is that institutions shape ethics. What we think is right or wrong depends in large part on the role we are playing. If we are playing the role of businessperson we apply different standards of right and wrong. We treat ourselves by the standard of that role, not by the normal standard of right and wrong. (We do account for other people's roles a little bit, but not much.) On Wall Street the role of a trade, esp. a bond trader, is to manipulate other people for financial gain. For instance, you could manufacture synthetic CDOs so you can sell CDS to hungry hedge funds and then dump the CDOs on some unwitting mutual fund manager, make a tidy profit, and who gives a fuck about all the grandmothers who had their 401ks in the fund. That isn't immoral. Finance is a zero sum game. Someone has to lose. So it's ok to do what needs to be done to win the game.

In that example it's hard to believe the person selling CDOs doesn't understand that what he is doing is wrong. He made that security specifically so that he could sell it to a dope, didn't he? I don't think so, based on anecdotal evidence.

Here is a similar example. Suppose that there is a food stamp program in New York City. It's common knowledge that you can get food stamps if you are living below the poverty line and you can use them to meet basic nutrition requirements. As it turns out, a few restaurants owned by rich businessmen donated to the mayor last campaign and food stamps actually can be used to buy any kind of food--even prepared meals or wine. It also turns out that if you go to the food stamp office, anyone is eligible to get the stamps as long as they wait in line. This is a closely guarded secret though, because if it became widely know that the mayor made these changes he'd take a beating in the polls because everyone agrees they are horrible ideas. Everyone can also probably see what the rules were setup that way: now those restaurant owners tell their best customers to go get food stamps then bring them there for expensive meals that don't cost a time since the city pays the tab.

I talked to someone about something completely isomorphic to that scenario and they couldn't understand what was wrong with a rich person taking the food stamps and using them to buy a nice dinner while the city foots the bill. I think it's a general problem, from talking to rich people, that they tend to be pretty ignorant of all the mechanisms they use to ensure the playing field isn't level in school and at work, and use that ignorant to maintain the illusion that their "success" as they define it is based on talent. A prime exhibit of this is all the rich people at Harvard who think they are actually "Harvard smart." (Maybe they are of above-avearge intelligence. But to get into Harvard on merit, e.g. be "Harvard smart," you need to be 1 in 1,000 or rarer. If you had any comparably smart peers in high school--nearly all of them did--you almost certainly aren't "Harvard smart.")

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