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Mathematical Finance in European Reforms on Ethics in the Financial Sector

Cleo Davies

After the outbreak of the global financial crisis in 2007, European reforms to introduce more ethics in the financial sector focused on correcting behaviour and practices of professionals and organizations. However, these reforms haven't taken into account the epistemological dimension of the question in any substantial way. To manage the systemic risks endogenous to modern financialized economies, the debate on introducing ethics into the financial sector and correcting behaviour should include the role of mathematical finance. Mathematical formulas that govern financial activities, notably the calculation of risk probabilities, have an impact on behaviour and beliefs in the financial sector. Decision makers have been prepared to acknowledge and to act upon the consequences that some agents in the financial sector were detached from reality and seemed to live in a world of their own. But they are not questioning in such a broad manner the fact that mathematical finance can be detached from the underlying economic realities of a market economy, and the consequences this might have on behaviour and beliefs in the financial sector. In the first part of the paper, we put forward some thoughts on the European institutions' use of the ethical narrative in financial sector reform and on the ethical standards that have been introduced into regulation after the crisis. Narratives include a focus on behaviour of agents and practices in the financial sector; the link between inequalities and financial markets; and reconnecting the financial sector and the real economy. The second part of the paper is an attempt to understand the role of mathematics in financialized economies and its consequences in light of the three narratives of ethics in the financial sector.

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