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Financial Market Ethics

Author

Listed:
  • David Easley
  • Maureen O’Hara
  • Itay Goldstein

Abstract

We develop a model of psychological-games-played-on-a-network to demonstrate a role for endogenously determined, rationally chosen ethics. Our analysis produces sharp results about contagion of nonethical or ethical behavior and the possible equilibrium configurations of each type of behavior. We find, and quantify, critical densities for clusters of each type of behavior that determine everything about contagion. We introduce society as a third player to investigate ethical failures as externalities. We use these results to show how regulations and network structure can affect whether clusters of ethical behavior can survive and how large they can be in a financial market setting.

Suggested Citation

  • David Easley & Maureen O’Hara & Itay Goldstein, 2023. "Financial Market Ethics," The Review of Financial Studies, Society for Financial Studies, vol. 36(2), pages 534-570.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:2:p:534-570.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac015
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    More about this item

    JEL classification:

    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General

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